Peso may climb amid hawkish policy signals

THE PESO could strengthen against the dollar this week as the Philippine central bank’s chief hinted at more rate increases moving forward to help tame red-hot inflation.

The local unit closed at P55.24 per dollar on Friday, weakening by 12 centavos from its P55.12 finish on Thursday, data from the Bankers Association of the Philippines’ website showed.

Week on week, the peso dropped by 82 centavos from its P54.42 finish on Feb. 3.

The peso opened Friday’s session at P55.25 per dollar. Its weakest showing was at P55.335, while its intraday best was at P55.15 against the greenback.

Dollars exchanged fell to $878.3 million on Friday from $1.143 billion on Thursday.

The peso depreciated after hawkish signals from officials of the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The BSP on Thursday raised benchmark interest rates by 50 basis points (bps) for a second straight meeting, and signaled more tightening to come to tame inflation.

The central bank increased its policy rate to 6%, the highest in nearly 16 years or since May 2007 when it stood at 7.5%. It has now hiked borrowing costs by 400 bps since May 2022.

The BSP raised its average inflation forecast for 2023 to 6.1% from 4.5% previously. This is beyond the BSP’s 2-4% target range.

It also hiked its 2024 inflation projection to 3.1% from 2.8% previously.

BSP Governor Felipe M. Medalla said after the meeting that they could not rule out a third or fourth rate increase this year and could consider a 25-bp or 50-bp hike at their next review on March 23.

Meanwhile, Cleveland Fed President J. Loretta Mester and St. Louis Fed President James Bullard both supported a 50-bp hike in the next Federal Open Market Committee meeting following data showing sticky US inflation.

US consumer prices accelerated in January amid higher costs for rental housing and food. The US consumer price index (CPI) increased 0.5% last month after gaining 0.1% in December.

In the 12 months through January, the CPI increased 6.4% following a 6.5% rise in December.

The US central bank this month raised its target interest rate by 25 bps to a 4.5%-4.75% range, bringing cumulative hikes since March 2022 to 450 bps.

The Fed’s next policy review will be held on March 21-22.

For this week, Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a report that the BSP’s hawkish tone could support the peso against the dollar.

“Markets will have to contend with the BSP capable of being uber hawkish than the Fed, if demanded by local inflation risks… Following the BSP’s recent hawkish stance, the BSP’s higher inflation forecast will likely prompt more rate hikes in succeeding months to deter persistent inflation overshooting, and thus, uplift peso sentiment. In short, the BSP’s terminal policy rate cannot stay at 6% where the policy rate is now, which will be supportive of the peso,” Mr. Asuncion said.

The market will also wait for upcoming releases for leads, including the Philippine balance of payments report on Monday, Fed meeting minutes, as well as US data on employment, housing, and manufacturing, Mr. Ricafort added.

Mr. Ricafort expects the peso to trade between P55 and P55.50 per dollar this week, while Mr. Asuncion sees the local unit moving from P54.70 to P55.40. — A.M.C. Sy