Most of the time, putting a political spin on anything economic is an exercise in foolish thinking. Granted, of course, that all of a government’s economic policy is made with political consideration. Every decision political leaders make is tainted with the idea of whether this will gain future votes.
The latest example is the appointment of Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. Upon his appointment came wailing and gnashing of teeth that Mr. Diokno was an “outsider” and not a career BSP employee. The cries that the BSP would lose its “independence” were at best ill-informed and at worst pure politics. If President Duterte was going to interfere with BSP policy, he should have done it in 2018.
The increases in base interest rates by the BSP in 2018 did nothing to lower inflation. It slowed the economy and in fact became a hidden and subtle force behind the increases in prices. Even the late BSP Governor Nestor Espenilla Jr. finally acknowledged the near-uselessness of the rate increase on inflation as higher prices were driven by “cost-push inflation” on which an increase in interest rates has negligible effect.
The fact that the peso depreciated from about 51.70 to the US dollar to 53 with the Diokno appointment was primarily driven by speculators in the international markets.
Domestic banks buy and sell the Philippine peso against the dollar based almost exclusively on physical demand for one currency or the other. However, apparently unbeknown to the experts, the peso is traded in the international markets by pure speculators that have no desire to physically hold either currency but are in the market for a quick trading buck.
However, the local banks must keep the domestically traded peso in line with the internationally quoted peso/dollar price.
The other consideration and perhaps the most important is that foreign “experts” have a vested financial interest in their comments. Do you honestly believe that these people care anything about the Philippines?
When in 2008 Goldman Sachs was saying that the price of crude oil was going to $200 per barrel, did they forecast that out of the goodness of their hearts? More likely was that Goldman and its clients were long on crude and needed you and me to buy higher to give them a profit exit.
When Mr. Diokno talked about the possibility of lowering BSP interest rates, the foreigners suddenly saw that they would no longer get an artificial overnight reverse repurchase facility at 4.75-percent rate on money parked in the Philippines as rates might go back to 3 percent. By comparison, the overnight rate in Thailand is currently at 1.75 percent. Of course, if they want a higher rate, Indonesia is at 6 percent.
Prior to complaints about Governor Diokno, about $1 billion of so-called hot money flowed into the country during January and February. It will be interesting to see what happens when March portfolio numbers are released.
In the next few days, the US Federal Reserve Open Market committee will meet and then announce any changes in US interest rate policy. It is very likely that the Fed will keep rates unchanged and forecast two rather than the previous three/four rate increases for 2019.
Meanwhile, the European Central Bank just made a U-turn on raising interest rates, now forecasting that negative interest rates will continue. The BSP should now return to doing what is in the best interest of the Philippine economy and not to please foreign money.
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