The Asian financial crisis and the float of the peso

The Philippine peso had traded at a stable 26.4 to the US dollar as late as June 1997, but the Asian financial crisis, transmitted through sudden capital reversals across the region, drove it down to roughly 42.7 to the dollar by January 1998, a depreciation of more than 60 percent in seven months. Bangko Sentral ng Pilipinas, in retrospectives on the period, describes its crisis-management strategy as centered on letting the peso float rather than defending a fixed level, paired with a relatively tight interest-rate policy aimed squarely at containing an inflation rate that had risen above 50 percent as import prices surged alongside the currency's fall. This combination avoided the kind of reserve-draining defense that forced neighboring currencies into even sharper, more disorderly collapses, though it still produced a severe but comparatively short recession. The experience reshaped BSP's institutional thinking about exchange-rate management for decades afterward, pushing it toward much greater tolerance for currency swings and away from the pre-crisis instinct to treat the peso's level as a policy target in its own right.