Eli M Remolona: Inflation dynamics as influenced by the peso-dollar
exchange rate
Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the EJAP (Economic Journalists Association of the
Philippines)-San Miguel Corp. Economic Forum, Manila, 8 July 2024.
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Introduction
[Secretary] Frederick Go, Secretary Ralph [Recto], Secretary Arsi (Arsenio Balisacan),
Vice-President Cecile [Ang], Usec (Undersecretary) Jojit (Joselito Basilio), [National]
Treasurer Sharon [Almanza], members of EJAP (Economic Journalists Association of
the Philippines), and fellow public servants, magandang umaga po.
The job of the BSP (Bangko Sentral ng Pilipinas) is to provide a stable environment for
the growth of investments in the economy. And so, today, I just want to make three
points about what the BSP is doing in that regard.
First, I want to talk about the dynamics of inflation when inflation is driven by supply
shocks, to help understand better what the BSP is trying to do. Second, I want to talk
about the dollar peso exchange rate and why it is moving the way it does. And third, I
want to talk about the implications of that for inflation.
Inflation dynamics
So, if you look at the picture, it depicts what happens to our inflation rate when inflation
is driven by the supply side. Here, we break down the different components of our CPI
(consumer price index) into the components that contribute to inflation.
If you look at the graph in the beginning, in the early part of 2022, it was mainly energy
(yellow part of the bar) and then it shifted to food. Today, it has shifted to the red part of
the bar. That is the price of rice.
And one thing you will notice is the roles of the different components of the CPI change
over time. That is the nature of a supply-driven inflation. If it were demand-driven, it
could be more even across the different components of inflation.
This is why we think the non-monetary measures that the government has put in place,
especially EO (Executive Order) 62 are so helpful, because that will help us get to
where we want to go, which is stable prices. By stable prices we mean inflation that is
somewhere between 2.0 (percent) and 4.0 percent.
Smooth fluctuation
Now, how about the peso? These are the changes in the exchange rate since the
beginning of the year. And you can see that the peso is in good company. You can see
that the peso relative to our peers has been somewhat stronger. It depreciated, as it
weakened against the dollar, but so have most of the currencies. And you can see that
the peso is even stronger than the Swiss franc since the beginning of the year. The
Swiss franc used to be a safe haven currency. While it is weaker than the Malaysian
ringgit, and the Vietnamese dong, it is much stronger than the Indonesian rupiah, the
New Taiwan dollar, the Thai baht, the South Korean won, and the Japanese yen.
And why is this? The strength of the dollar has been because the dollar has become the
single most important safe-haven currency. When there are tensions, uncertainties
around the world, it makes the dollar stronger. In fact, even when the uncertainty is in
the US (United States), it makes the dollar stronger. In recent months, it has been about
the messaging from the FOMC (Federal Open Market Committee) of the Fed. The Fed
has been saying it is going to be high for longer, and that has weakened most of the
other currencies against the US dollar.
But so, what? What happens when the dollar gets stronger, or the peso gets weaker is
that some inflation comes in because our imports are all mostly invoiced in US dollars.
If you look at the chart on the left, you have two bars. The one on the left is about what
the effect of peso depreciation is on inflation. It was strong during the period before the
shift to inflation targeting in 2002. Today, we are reaping the benefits of that shift
because (as the second bar shows) the effect of the depreciation of the peso on
inflation has become weaker.
What does that mean in terms of inflation today? If you look at the chart on the right, the
red line is what the inflation rate has been. And then the broken blue line, is what
inflation would have been had the peso not weakened against the dollar.
The difference is actually very modest. The difference between the red and the blue as
of today is about 0.366. It is about a tenth of our inflation rate. So, kayang-kaya.
What we worry about is when the peso depreciates too sharply. We do not want too
much volatility in the peso. We want the peso to move based on fundamentals. Too
much volatility is bad for trade, for both imports and exports. So, we want to make the
movement of the peso smoother, but we expect the peso to move according to
fundamentals. So, those are the three points.
Last mile
Let me say that we are now in what we call the last mile. The last mile is the point
[when] you are trying to be very careful in balancing supply and demand. When inflation
is high, that means demand is too strong. Demand exceeds our capacity.
So, what we are trying to do is strike the balance between supply and demand so that
we end up with stable prices. We are almost there. But we have to be more careful
because there is a risk we might overdo it. There is a risk that might cause a lot of
unnecessary loss of output.
Maraming salamat at mabuhay kayo.