The Central Bank (Bangko Sentral ng Pilipinas or BSP) of the Philippines believes that the latest round of quantitative easing in the United States is likely to cause more upward pressures on the Philippines peso, which already hit a new 30-month high of 42.53 against the dollar on November 4, 2010.
 
"Foreign exchange flows can be heavier and more destabilizing.  There is more pressure building up against the peso," said BSP deputy governor Diwa Guinigundo.
 
Mr. Guinigundo was referring to the latest decision by the Federal Reserve to buy US$600 billion in government bonds, which economists said could lead to more foreign funds going to other countries and in effect pull the dollar lower.
 
"It may in fact exacerbate what is going on in emerging markets including the Philippines.  In the US, the issue is whether quantitative easing will actually work. More foreign exchange goes out in search of yield," Guinigundo said.
 
BSP Governor Tetangco, however, said the bank would be present in the currency market to moderate any wide swings of the peso against the greenback.
 
"Bangko Sentral does not go against the fundamental currency trend, but will make sure that any exchange rate volatilities arising from the inflows are moderate," Tetangco said.
 
Tetangco admitted that with yields in the US expected to remain low, the shift of global funds to emerging markets including Philippines, may continue."
 
"Bangko Sentral will therefore remain vigilant in monitoring developments and gauging how effectively this Fed move will perk real US growth, and therewith global inflation outlook," Tetangco said.
 
The near zero interest rate in the US, Japan and other advanced economies are forcing global fund managers to invest in emerging markets with higher interest rates.
 
While the Philippines kept its overnight borrowing rate at record low level of 4 percent, it remained one of the highest in the region.
 
Net foreign buying of Philippine stocks pushed the stock index to record level this month, and caused upward pressures on the peso. About $1.65 billion net inflows of foreign portfolio investments were registered as of the second week of October.
 
Guinigundo said that in the Philippines the challenge is "to increase demand for foreign exchange and temper peso appreciation."
 
The monetary board, which acts as the policy making body of the Bangko Sentral, will meet again on November 18 for its policy meeting, but analysts said the board is likely to keep the interest rates at record low levels, given the manageable inflation outlook and to avoid attracting more funds from abroad that are seen to push the peso higher.
 
Tetangco said that Bangko Sentral has the necessary tools to address the fluctuations in the foreign exchange.
 
"So far, the use of our expanded tool kit (the policy mix in addition to policy interest rates) has been successful in keeping rate movements in line with regional trends, but we continue to refine our use of these tools," Tetangco said.
 
Bangko Sentral has earlier raised the ceiling for foreign exchange that investors and tourists can take out from the country, to match the recent surge in capital inflows.