BSP ready to hike rates by 50 bps as peso nears record low against dollar

By Keisha B. Ta-asan

THE BANGKO SENTRAL ng Pilipinas (BSP) is prepared to raise its policy rate by 50 basis points (bps) in August as the Philippine peso on Thursday breached the P56 level against the US dollar to move closer to its record low.

BSP Governor Felipe M. Medalla on Thursday said the recent hawkish stance of the US Federal Reserve has placed “strong depreciation pressures” on global currencies such as the peso.

“If such pressures are left unchecked, these could add to the already high domestic inflationary pressures,” he told reporters via Viber.

The peso closed at P56.06 versus the dollar on Thursday, down by 39 centavos or 0.7% from the previous day, data from the Bankers Association of the Philippines showed.

This is the peso’s worst finish since Sept. 27, 2005’s P56.30 a dollar and just 39 centavos away from the record low of P56.45 on Oct. 14, 2004.

“The BSP is prepared to be more aggressive in raising its policy rate, compared to its initial gradualist stance. In particular, BSP is prepared to raise its policy rate by 50 bps by August,” Mr. Medalla said, referring to the Aug. 18 meeting.

The Monetary Board has raised benchmark interest rates by a total of 50 bps so far this year via 25-bp hikes at its May 19 and June 23 meetings, bringing the policy rate to 2.5%.

Mr. Medalla earlier this week said the BSP may hike rates by at least 100 bps more this year, after inflation rose 6.1% in June — the fastest in nearly four years.

“There are pros and cons to gradualism. Now, I would like to add that if the inflation is too high, even if the causes are impervious to BSP’s kit of policy instruments, a monetary policy response may be necessary,” Mr. Medalla said on Thursday.

“It’s not prudent to let factors that significantly affect the exchange rate add further to inflation that is already high.  More so, if we can’t rule out that we might miss our 2 to 4% (inflation) target, not just this year but next year as well,” he said.

The BSP chief said they are “ready to take further policy actions, if needed.”

“It will also continue to support and advocate for non-monetary actions by other government agencies to contain any further inflationary pressures that may spill over to 2023,” he added.

The peso opened Thursday’s session at P55.90 against the dollar. Its intraday best was at P55.78 while its weakest showing for the day was at P56.09 versus the greenback.

Dollars exchanged slipped to $1.11 billion on Thursday from $1.24 billion on Wednesday.

The peso has weakened by P5.06 or 9.92% from its P51-per-dollar close on Dec. 31, 2021.

The peso continued to weaken after hawkish signals from the US Federal Reserve minutes of its last meeting, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

The US Federal Reserve committed to keep raising interest rates for longer to curb soaring inflation, minutes of the June 14-15 policy meeting showed. Markets are pricing in another 75-bp hike at the Fed’s next meeting.

“Broad USD (US dollar) strength has dominated trading this week as investors seek safe haven on recession fears,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

“As such, most EM (emerging market) currencies have weakened sharply against the USD. The dollar was also boosted as it looks like the Fed is determined to tighten policy in order to snuff out inflation in the US,” Mr. Mapa said.

The peso has fallen the most against the US dollar among emerging currencies, down by more than 5% since June 10.

Much of the investors’ anxiety has been attributed to the narrowing interest rate differentials with the US Fed.

“The dollar index (DXY) just reached an all-time high since the start of the year, i.e. across-the-board, the USD rose against major currencies. This contributed to today’s depreciation of the peso,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

“Moving forward, the peso is expected to trend downwards until Q3 due to a widening trade deficit and aggressive rate hikes of the Federal Reserve,” Ms. Velasquez added.

The peso exchange rate is also weaker following the release of data of the country’s dollar reserves in June, Mr. Ricafort said.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the gross international reserves (GIR) stood at $101.983 billion as of end-June, 1.6% down from the $103.646 billion as of end-May and 3.5% from the record $105.762-billion level as of end-June 2021.

“Domestic developments have also contributed to the PHP’s weakness, in particular the stark widening of the country’s import bill, due to bloated dollar values for products and an actual increase in import volumes as the economy reopens,” Mr. Mapa said.

“With the peso on its heels, the BSP has a long and nerve wracking wait until 18 August, or when they have a chance to offload another round of rate increases.”

For Friday, Mr. Ricafort gave a forecast range of P55.85 to 56.15, while a trader said the peso could move from P55.95 to P56.15 against the dollar.