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By Luisa Maria Jacinta C. Jocson, Senior Journalist
THE BANGKO SENTRAL ng Pilipinas (BSP) indicated that it is considering transitioning to a point target for inflation, moving away from the current 2-4% target range, stated its top official.
“We’re seriously contemplating just having a point, a target level,” BSP Governor Eli M. Remolona, Jr. remarked to reporters during a press gathering on Friday.
“A single figure, indeed. In the US, it stands at just 2%. In numerous other central banks, it’s merely one figure,” he further stated.
In December, the Development Budget Coordination Committee, in consultation with the BSP, established the inflation target at 2-4% from this year until 2028.
A medium-term inflation target aids in “reinforcing the forward-looking stance towards monetary policy design aimed at anchoring inflation expectations to the target,” the central bank previously mentioned.
Mr. Remolona noted that the inflation target they are considering might be slightly lower than the 3% midpoint of its existing target range.
“Perhaps 2% is sufficient. We’re still analyzing the data,” he added.
However, Mr. Remolona indicated that the target cannot be excessively low as it impacts economic output.
“The rationale for not setting it to zero is that in a growing economy, it’s essential to allow relative prices to fluctuate. Allowing relative prices to adjust usually leads to downward stickiness,” he stated.
“Permitting these adjustments implies some inflation. A target that is too low restricts the economy,” he continued.
Historically, the central bank relied on operating targets within a framework for monetary aggregates for its policy choices, according to a report by the International Monetary Fund (IMF).
The BSP adopted a modified targeting framework in 1995 after inflation surged into double-digit figures due to a rice supply crisis. This method prioritized price stability over monetary aggregate ceilings.
In 2002, the central bank officially transitioned to inflation targeting.
Between 2012 and 2014, the inflation target range was set at 4% ± 1.0 percentage point. In 2015, the BSP’s inflation target was defined at 3% ± 1.0 percentage point, continuing up until 2022, although the central bank started employing the alternative 2-4% band around this period.
The BSP is currently collaborating with the IMF to analyze the transition to a point target for inflation.
“There won’t be an update in the near future. It was something we requested the IMF to investigate. They won’t provide an immediate response, as they require time. Nonetheless, I’m comfortable with our range between 2% and 4%.”
He added that the central bank might shift to the point target within a year at the latest.
RRR ADJUSTMENTS
Meanwhile, the BSP leader stated that reserve requirement ratio (RRR) cuts are improbable for the remainder of the year.
“Perhaps (RRR cuts) for next year. We aim to enhance the yield curve reliability, which necessitates better liquidity management within the system, with the reserve requirement being a component of that,” Mr. Remolona stated.
“Thus far, we’ve been managing liquidity by issuing our own BSP bills. We’ve been releasing substantial quantities of BSP bills to absorb the liquidity within the system.”
As of March, the RRR for universal and commercial banks, along with nonbank financial institutions with quasi-banking functions, was lowered by 200 basis points (bps) to 5% from the existing 7%.
The RRR for digital banks also decreased by 150 bps to 2.5%, while thrift institutions saw a reduction of 100 bps to 0%.
Rural and cooperative banks have maintained a zero RRR since October, which was the last time the BSP adjusted reserve requirements.
“Reducing the reserve requirement expands liquidity in the system. Hence, we are working to manage that,” Mr. Remolona stated.
“We might initiate the issuance of BSP bills. An alternative would be selling the Treasury securities we possess, which would similarly affect liquidity.”
Previous data from the central bank indicated that around 50% of its market operations are conducted through BSP bills.
‘DE-DOLLARIZATION’
Meanwhile, Mr. Remolona shared that moving away from the dollar as the world’s reserve currency would be a prolonged and gradual endeavor.
This encompasses discussions of “de-dollarization” or the shift away from the US dollar influenced by policy uncertainties from President Donald J. Trump’s administration.
“As you are aware, it has been a safe-haven currency for an extended period. Whenever global tensions arise, the dollar strengthens. Funds tend to flow into the dollar,” he noted.
“Theoretically, the safe-haven advantage of the dollar may diminish over time. However, it’s a gradual transition. It doesn’t occur instantaneously,” he added.
The dollar index, measuring the greenback against a set of currencies, fell to a three-week low, according to reports from Reuters.
Over the week, the dollar dropped 1.9%, poised for its most considerable weekly percentage decline since early April.
This followed Mr. Trump’s latest trade threats, suggesting 50% tariffs on European Union imports starting June 1 and contemplating a 25% tariff on any Apple iPhones manufactured outside the US.
Mr. Remolona observed that the United Kingdom’s primary invoicing currency was once the US dollar and their trade was conducted in dollars as well.
“Then Brexit occurred, and their invoicing currency transitioned to the euro. Hence, the dollar’s supremacy is not eternal. It can be diminished,” he remarked.
Mr. Remolona also pointed out the difficulty of establishing an “international currency.”
“There was an initiative to create an international currency. This has not materialized. Therefore, it remains lackluster. Those discussions come and go,” he said.
“Prior to the renminbi, it was the Japanese yen that didn’t succeed. I am uncertain if there’s a different approach. It’s still in discussions. It may take a lengthy period.”
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