Peso rebound seen after BSP policy stance

The peso may rebound against the US dollar this week on hawkish remarks from the Bangko Sentral ng Pilipinas (BSP) chief following the policy hold on Thursday. 

The local unit closed at PHP 56.795 per dollar on Friday, strengthening by six centavos from its PHP 56.855 finish on Thursday, based on Bankers Association of the Philippines data.

The peso also appreciated by two centavos from its PHP 56.815-a-dollar finish a week earlier. Year to date, the peso has weakened by 1.8% or PHP 1.04 from its PHP 55.755 close on Dec. 29, 2022.

The local currency opened Friday’s session at PHP 56.85 against the dollar. Its weakest showing was at PHP 56.90, while its intraday best was at PHP 56.765 versus the greenback.

Dollars exchanged increased to USD 994.31 million on Friday from USD 815.28 million on Thursday.

The Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that the peso strengthened versus the dollar on Friday after hawkish signals from the BSP governor.

In an interview with Bloomberg TV on Friday morning, BSP Governor Eli M. Remolona said a possible rate hike at the next policy review on Nov. 16 may not be the last amid risks to inflation.

“We’re not convinced it would be the last one. It won’t be the last hike in the cycle,” he said. “We’re still in a hawkish stance.”

The Monetary Board maintained key interest rates for a fourth straight meeting on Sept. 21 but signaled it might resume tightening this year if inflation pressures persist.

The BSP kept its key benchmark rate at 6.25%, the highest in nearly 16 years. Interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75% and 6.75%, respectively.

The Monetary Board hiked interest rates by 425 basis points (bps) from May 2022 to March 2023.

“If the inflation numbers had been just a bit worse, we might have gone for a hike this time. Nonetheless, the vote was unanimous, but the numbers were pretty close between hiking and not hiking,” Mr. Remolona said.

August inflation unexpectedly rose to 5.3% from 4.7% in July, bringing the year-to-date average to 6.6%, still above the central bank’s 2-4% target and the revised 5.8% forecast for the year.

Last week, the BSP also raised its average inflation forecast for 2023 to 5.8% (from 5.6%) and to 3.5% (from 3.3%) for 2024. It kept its 2025 forecast at 3.4%.

For this week, Security Bank Corp. Chief Economist Robert Dan J. Roces in an interview said the peso will “consolidate” as the market will continue to react to the hawkish remarks of the BSP governor.

According to Mr. Remolona, the impact of the BSP’s aggressive monetary tightening may continue up to the first half of next year.

“We’ll still see the rates, the previous hikes weighing on economic activity in the Philippines. The lags are long,” he said. “Another hike would mean falling below potential. But that’s a price we may have to pay if inflation is too high.”

Meanwhile, the BSP chief is not concerned about the depreciation of the peso, which almost touched the P57-to-a-dollar level on Thursday.

“Currency weakness has been a factor but not that much of a factor. The weakness seems not to come from the difference in policy rates between us and the US. It comes more from uncertainty about the economic outlook,” Mr. Remolona said.

He said that the movements in the foreign exchange market were not that sharp.

“Usually, small movements don’t affect expectations of inflation in the Philippines. Once they become very sharp then it begins to affect expectations and that is what we worry about. But so far it has not been the case,” he said.

The US Federal Reserve signaled it would keep rates higher for longer, even as it opted to keep the target Fed fund rate unchanged at 5.25-5.5% at its meeting last week. 

In a note, MUFG Senior Currency Analyst Michael Wan said they have raised their peso forecasts against the dollar for this year and 2024. 

The peso is now seen to end the year at PHP 57.30 (from PHP 56.70 previously) versus the greenback, before weakening further to PHP 57.50 (from PHP 55.20) in the next 12 months, along with some underperformance of other Asian currencies. 

“Our forecast change reflects a stronger pickup in oil prices than we assumed, while the US Dollar and US rates have also been higher than our forecasts,” Mr. Wan said.  

He also said the BSP may only start cutting policy rates in the second half of 2024 amid risks to inflation and to the peso.

For this week, Mr. Ricafort gave a forecast range of PHP 56.55 to PHP 56.95 versus the greenback, while Mr. Roces expects the local unit to move within PHP 56.58 to PHP 56.90 per dollar. — Keisha B. Ta-asan