Peso to trade at PHP57 until late next year

The peso may trade at the PHP 57-per-dollar level until 2024 amid continued upside risks to prices and with the central bank keeping rates elevated, MUFG Global Markets Research said.

“We forecast gradual weakness in peso against the US dollar at PHP 57.30 in three months and PHP 57.50 in 12 months, implying some FX (foreign exchange) underperformance through 2024,” it said in a report.

It expects the peso to end at PHP 57.50 a dollar in the first quarter of next year and stay at that level until the third quarter.

The peso closed at PHP 56.73 per dollar on Tuesday. Year to date, the peso has weakened by 97.5 centavos or 1.71% against the dollar from its PHP 55.755 close on Dec. 29, 2022.

“Risks to our peso forecasts come from oil, rice and the US dollar,” MUFG Global Markets Research said. “The central bank raised its 2024 inflation forecast to 4.7% (from 3.5%), while also saying indicators point to second-round effects to inflation broadening, even as demand is moderating.”

Headline inflation rose for a second straight month to 6.1% in September. Year to date, inflation averaged 6.6%, well above the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target.

“The BSP raised its key policy rate by 25 bps (basis points) in an off-cycle announcement… The Philippine central bank move also follows on from Bank Indonesia’s recent surprise rate hike to stem currency weakness, highlighting the increasing spillover impact of dollar strength and higher US yields on Asian central banks,” MUFG Global Markets Research said. 

Last week’s off-cycle move by the BSP brought the policy rate to a 16-year high of 6.5%.

The central bank has increased rates by 450 bps since May 2022.

The BSP could hike again in the near term if supply shocks materialize, MUFG Global Markets Research said. It expects the BSP to begin its easing cycle in the fourth quarter next year.

Philippine economic growth is slowing compared with other Asian countries, but inflation remains sticky, putting pressure on the local currency, said MUFG Global Markets Research.

“As such, the policy trade-offs are becoming more difficult,” it added. — AMCS