Peso strengthens on aggressive BSP hike

THE PESO continued to strengthen against the dollar on Thursday as the Bangko Sentral ng Pilipinas (BSP) delivered its biggest-ever rate hike amid growing inflation pressures.

The local unit closed at P56.15 per dollar on Thursday, gaining 11 centavos from its P56.26 finish on Wednesday, based on Bankers Association of the Philippines data.

Still, year to date, the local unit has weakened by 10.09% or by P5.15 from its close of P51 versus the dollar on Dec. 31, 2021.

The peso opened Thursday’s session at P56.30 per dollar. Its weakest showing was at P56.45, while its intraday best was at P55.98 against the greenback.

Dollars exchanged surged to $1.65 billion on Thursday from $994 million on Wednesday.

“The peso appreciated following the off-cycle large 75-bp (basis point) policy rate hike from the BSP today,” a trader said in an e-mail on Thursday.

The BSP Monetary Board on Thursday delivered an all-time high hike of 75 bps in an “urgent action” amid signs of “sustained and broadening price pressures.”

The hike was done outside of their scheduled policy meetings and was the first off-cycle increase since April 16, 2020. Following Thursday’s move, the BSP has now raised rates by a total of 125 bps this year and the key rate is now at 3.25%, matching the March 2020 level.

The central bank in 2020 cut borrowing costs by a cumulative 200 bps to support the economy amid the coronavirus pandemic.

The BSP has become more aggressive as headline inflation reached 6.1% in June, the fastest in nearly four years. This brought the first-half average to 4.4%, above the central bank’s 2-4% goal but still lower than its 5% forecast for the year.

This also comes as the Federal Reserve is expected to continue being hawkish, especially after US consumer prices jumped by 9.1% annually in June, the fastest in more than 40 years, data released on Wednesday showed.

BSP Governor Felipe M. Medalla last week said the Fed’s aggressive stance has put pressure on the peso, with the local currency’s weakening adding to inflation pressures.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that the rate increase could help support the peso but could also lead to higher lending costs.

MUFG Bank analyst Sophia Ng said reaction to the BSP’s move was felt immediately in the market on Thursday. 

“It is also due to this tightening move that the peso is one of the only two AXJ (Asia ex-Japan) currencies that is strengthening against the dollar so far today while most others are under pressure from a stronger dollar driven by rising market expectations of more aggressive tightening by the Fed,” Ms. Ng said in a note.

“Prospects of more rate hikes by the BSP do not change our overall outlook on the PHP, as other factors such as ongoing dollar strength and widening trade deficits will continue to be key drivers of the peso’s weakness in 2H22,” she added.

For Friday, the trader said the peso may weaken anew against the dollar due to a potentially elevated US producer inflation report overnight.

The trader sees the peso moving between P56.00 and P56.20 on Friday, while Mr. Ricafort gave a slightly wider forecast range of P56 to P56.25 per dollar. — Keisha B. Ta-asan