Remittances sent home by Philippine citizens abroad dilute the effectiveness of the benchmark interest rate, even as they bolster consumption and growth, a study by Bangko Sentral ng Pilipinas said.
The policy pass-through “tends to moderate” when the impact of large remittance flows is taken into account, Deputy Director Veronica Bayangos said in a paper published on the central bank’s website July 16. It used simulation results from a macro econometric model from March 2001 to March 2011 to show the impact on growth, inflation and the exchange rate.
Bangko Sentral has expanded its policy toolkit in recent years to include banks’ reserve requirement, special deposit accounts, foreign exchange and lending rules. Remittances, which account for the equivalent of about a tenth of the economy, are the largest source of foreign exchange after exports, and are forecast by the central bank to increase 5 percent this year.
“The preliminary simulation shows that a significant rise in remittances leads to appreciation of the peso-dollar rate,” the study said, which may make the central bank reluctant to raise borrowing costs. “At present, the BSP monitors the exchange rate movements when setting the policy rate, but it only moves to dampen the impact of significant exchange rate shocks and not to target the exchange rate,” it said.
Bangko Sentral, which held its overnight borrowing rate at 4 percent for a second meeting last month, tightened rules on capital inflows after the peso climbed to 41.6 per dollar on July 4, the highest level since April 2008. The monetary authority has banned foreign funds from special deposit accounts, and said it is monitoring inflows via non-deliverable forwards.
Money sent home by the more than 9.4 million Filipinos living in countries from the U.S. to Saudi Arabia climbed to a record $20 billion in 2011. Remittances rose 5.3 percent from a year earlier in the January-May period, data showed yesterday.
The peso is the best performer against the U.S. dollar among Asia’s 11 most-traded currencies this year, having gained about 5 percent. Greater remittances flows also lead to higher consumer spending, and thus a fall in the output gap, and an increase in inflation, the study said.
“A central bank trying to stabilize the output gap, inflation and the exchange rate will find it difficult to achieve all the objectives when remittances are substantial,” the study said, adding that “calibration of policy rate” may not be sufficient as an instrument of monetary policy.
The $225 billion economy expanded 6.4 percent in the first quarter, the fastest pace since 2010, as President Benigno Aquino steps up spending on infrastructure.
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