BSP firm on decision to leave exchange rate alone

MANILA, Philippines- Despite strong protests from overseas Filipinos and the export industry, the Bangko Sentral ng Pilipinas on Thursday stood by its position that it would not intervene heavily in the foreign exchange market. The central bank also said it cannot afford to impose multiple exchange rates to benefit specific sectors which are hurt by the weakening US dollar. Last week, overseas Filipinos in Hong Kong declared a one-day "remittance boycott" as a form of civil disobedience against an administration that they believe is not doing enough to make sure the weakening US dollar does not corrode their earnings. Hong Kong is one of the top five country destinations of OFWs and consequently, a major source of remittances. Militant group Migrante International’s chapters in the Middle East and in other countries will follow on March 8, coinciding with the annual observance of Women’s Day. "Heavy intervention cannot be sustained for a long period of time because it could create problems for monetary policy," the BSP said in a statement. "If the BSP continues to buy large amounts of dollars, it will have to siphon off the equivalent amount of pesos it has released in the market to keep inflation stable," the BSP said. According to the central bank, it would not be able to do this without incurring massive costs. Managing foreign exchange volatility in the first eleven months of 2007 cost the central bank P83.9 billion. The BSP said that if it does not absorb excess pesos that it would use to buy dollars from the market, money supply will rise sharply, leading to spikes in consumer prices and a weakening of the peso's purchasing power. On the other hand, the BSP said fixing the exchange rate would be even more expensive, since it would have to commit to sell or buy any amount of foreign currency demanded in excess of what can be supplied by the market. In times of massive dollar inflows, the BSP said it would have to buy the excess dollars to keep the foreign exchange at the desired level. "In so doing, reserves are accumulated but pesos are released into the system from which inflationary pressures could result," the BSP said. "This will be very costly in terms of the difference between the cost of borrowing to pay for the dollar purchases and the return to the BSP on the foreign exchange purchases," it added. - GMANews.TV