Effects of volatility in the foreign exchange (FX)

by Blogger | Jul 14, 2023 | Business

In a discussion paper titled “Does Exchange Rate Volatility Matter for Economic Growth,” BSP researchers said exchange rate volatility can lower growth in some economies like the Philippines, but only in the short term.

“In the short run, exchange rate volatility exerts a negative impact on some economies and a positive impact on others. A percentage change in exchange rate volatility decreases economic growth by about 0.14% in China, 0.19% in Singapore, and 0.4% in the Philippines,” the BSP researchers said.

The study tackled the effects of volatility in the foreign exchange (FX) markets of 11 Asia-Pacific economies from 2002 to 2022.

However, this negative impact on economic growth in China, the Philippines, and Singapore dissipated in the long run, BSP researchers said.

“This may imply that measures used by these economies to respond to exchange rate volatility could be effective and that other factors are more important for economic growth in the long run,” they said.

One of the most known episodes of FX volatility in the Philippines occurred last year, when the peso hit a record low of P59 against the greenback in October, amid the US Federal Reserve’s aggressive tightening.

The BSP hiked policy rates to avoid a narrower interest rate differential with the US Fed and used its dollar buffers to mitigate the volatility in the foreign exchange market.

From March 2022 to June 2023, the Fed raised its key rates by 500 basis points (bps) to 5-5.25%, while the BSP hiked by 425 bps to 6.25% from May 2022 to March 2023.