Peso weakens anew vs dollar following BSP’s policy decision

The peso weakened anew against the dollar on Thursday after the Bangko Sentral ng Pilipinas (BSP) held its benchmark rates steady and raised its inflation forecasts for 2023, 2024 and 2025.

The local currency closed at PHP 56.77 versus the dollar on Thursday, dropping by 25.50 centavos from Wednesday’s PHP 56.515 finish, data from the Bankers Association of the Philippines’ website showed.

The local unit opened Thursday’s session at PHP 56.67 per dollar. Its intraday best was at PHP 56.57, while its weakest showing was at PHP 56.81 against the greenback.

Dollars traded went down to USD 960.55 million on Thursday from $1.02 billion on Wednesday.

The peso declined against the dollar after the Monetary Board kept borrowing costs unchanged and raised its inflation forecasts following its meeting on Thursday, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The peso continued to weaken as market participants remained cautious ahead of the BSP policy decision,” a trader said in a Viber message.

The BSP on Thursday kept benchmark interest rates unchanged for a third straight meeting as it expects inflation to return within its 2-4% target next quarter, even as upside risks to prices remain.

The Monetary Board maintained its policy rate at a near 16-year high of 6.25%. The interest rates on the BSP’s overnight deposit and lending facilities were also kept at 5.75% and 6.75%, respectively.

The decision was in line with the results of a BusinessWorld poll last week, which showed that 13 out of 15 analysts see the central bank keeping rates steady.

The BSP raised borrowing costs by a total of 425 basis points (bps) from May 2022 to March 2023.

The central bank also raised its inflation forecasts to 5.6% from 5.4% for 2023, 3.3% from 2.9% for 2024, and 3.4% from 3.2% for 2025.

Headline inflation eased for the sixth consecutive month to 4.7% in July from 5.4% in June, bringing the seven-month average to 6.8%.

The peso was also dragged down by hawkish signals from the minutes of the US Federal Reserve’s July 25-26 meeting, Mr. Ricafort added.

Fed officials were divided over the need for more interest rate hikes at the US central bank’s July 25-26 meeting, with “some participants” citing the risks to the economy of pushing rates too far even as “most” policy makers continued to prioritize the battle against inflation, according to minutes of the session that were released on Wednesday, Reuters reported.

In general, the minutes said, Fed policy makers agreed that the level of uncertainty remained high, and that future interest rate decisions would depend on the “totality” of data arriving in “coming months” to “help clarify the extent to which the disinflation process was continuing” — a possible indication of a more patient approach to any further rises in borrowing costs.

The Fed raised borrowing costs by 25 bps at its July 25-26 meeting, bringing its benchmark overnight rate to a 22-year high of 5.25% to 5.5%.

Since it began its tightening cycle in March 2022, the US central bank has hiked rates by a cumulative 525 bps.

The US central bank will hold its next policy meeting on Sept. 19-20.

For Friday, the trader said the peso could continue to weaken after the BSP’s monetary policy decision.

The trader expects the peso to move between PHP 56.65 and PHP 56.90 per dollar on Friday, while Mr. Ricafort sees it ranging from PHP 56.65 to PHP 56.95. — A.M.C. Sy with Reuters