Peso weakness hits inflation harder, BSP study shows
The Bangko Sentral ng Pilipinas (BSP) should be more vigilant when the peso weakens than when it strengthens, according to a central bank study.
Findings show that currency depreciation feeds more strongly into inflation than appreciation.
In a discussion paper, economists at the BSP said consumer prices tend to rise more quickly when the peso falls. This, as imports become more expensive and businesses pass on higher costs to consumers.
But when the peso strengthens, inflation does not slow by as much. The researchers include Sanjeev Parmanand, Reizle Jade Platitas, Sarah Jane Castañares and Jasmin Dacio.
They attributed it to the “downward stickiness of prices.” Some businesses are often reluctant to cut prices even when their import costs decline.
“We found that there is asymmetry in the pass-through to inflation between appreciation and depreciation episodes both in the short run and the long run,” the group said.
“Exchange rate pass-through is larger and statistically significant during depreciation episodes, while there is limited pass-through during appreciation episodes,” they added.
A weaker peso carries mixed implications for the Philippines. It can push up import costs and risk rekindling inflation.
Beyond prices, it can also increase the peso value of foreign-currency debt held by the government and private companies.
But depreciation can bring benefits as well. It raises the peso value of remittances from millions of overseas Filipino workers and can make exports more competitive.
While a stronger peso can make imports more affordable, the central bank also does not welcome rapid appreciation, which can hurt exporters and families that rely on remittances.
Uncertainty over the path of US monetary policy easing recently strengthened the dollar and pushed the Philippine peso to a record low close of 59.44 per dollar last Jan. 15.
The currency has since rebounded to the 57 level, as better-than-expected inflation data in America raised expectations that the Federal Reserve could resume cutting interest rates later this year.
Looking ahead, the researchers said the BSP might need to respond more forcefully during sharp depreciation episodes, when the pass-through to inflation is stronger. By comparison, monetary policy may not need to react as aggressively to peso appreciation, given its more limited impact on inflation.
“Exchange rate developments, particularly depreciation episodes, require close monitoring as the risk of inflation is amplified when there are large, positive movements in the exchange rate,” they added.
