Banko Sentral ng Pilipinas: Peso above P55 to continue; economists anticipate additional rate increases
The Bangko Sentral ng Pilipinas, which does not set a peso-US dollar target level, stated that it might stay above the P55 level until the following year and perhaps even into 2024.
The BSP stated in its most recent November Monetary Policy Report (MPR) that the projected exchange rate is higher than they predicted in October. The MPR was published on the same day that the Monetary Board increased the policy rate again by 75 basis points (bps) on Nov. 17.
The DBCC’s (Development Budget Coordination Council) assumptions of P51.00-53.00/US$1 for 2022 and P51.00-55.00/$1 for 2023 and 2024 are likely to be exceeded by the exchange rate, according to the MPR. On July 8 of last year, when the peso was trading at P55, the DBCC accepted the exchange rate assumptions. By September 29, the exchange rate had fallen to a record-low low of P59.
The BSP stated that the projected exchange rate path was “higher than in the previous round, reflecting the continued depreciation of the peso as well as higher outlook for US interest rates, consistent with cumulative policy rate hikes by the Federal Reserve of 425 bps in 2022 and 50 bps in 2023.”
The BSP emphasized that the peso’s decline was merely a response to world events and the US dollar’s strong position amid rising US interest rates.
Analysts predict that the BSP will continue to tighten monetary policy settings for the rest of the year by 75 basis points (bps) to as much as 150 bps based on the MPR, which also reports the results of its survey of private sector economists.
“The majority of them (are) anticipating rate increases of 75 bps in November and 50 bps in December. They did, however, point out that the size will still be largely determined by the US Fed’s monetary policies. Most experts foresee a 25- to 75-bps follow-through policy rate increase for 2023, and most anticipate a 25- to 150-bps reverse for 2024, according to the BSP.
Felipe M. Medalla, the governor of the BSP, stated last Thursday that although the peso has recently appreciated to the P57 level, it wasn’t just because of the BSP’s participation in the spot market but also because the US dollar has weakened due to a mild slowdown in US inflation.
Medalla claimed that the market’s awareness that the BSP is intervening in the exchange rate more actively and that it plans to raise the policy rate by as much as 75 basis points to 5% in order to maintain a favorable interest rate differential for the peso was helpful.
He claimed that such overt signaling as he used prior to the policy meeting on November 17 was unnecessary in normal circumstances. However, Medalla noted that these are exceptional times, and he defined typical circumstances as those in which BSP is not overly concerned about the US dollar and its impact on inflation.
ANTICIPATED MOVE
As Governor Medalla promises to preserve the 100-bp spread, we also anticipate BSP to match any rate increase made by the Fed in December, he added in an email.
Emilio S. Neri, Jr., the lead economist at the Bank of the Philippine Islands (BPI), stated that the BSP’s rate increases this year will continue to depend on variables including fluctuations in domestic prices, the performance of the US currency, and global oil prices.
In contrast to their staunchly dovish direction and policy rate decisions in late 2021 and the first semester of 2022, “what’s vital is the board demonstrates flexibility and resolve to employ its multiple policy tools to put both core and headline inflation back on target,” Mr. Neri said.
China Bank Corporation Domini S. Velasquez, the BSP’s chief economist, stated in a Viber message that although October’s inflation was higher than anticipated, the BSP’s rate increases appear to be on pace.
“Food shortages and supply shock caused by previous typhoons and rising food costs were a large portion of the print’s surprise drivers in October. She added that a greater rate hike on Thursday will not improve supply difficulties and that the National Government should address this by assuring an adequate food supply at reasonable costs.
According to Mr. Mapa of ING, the BSP is not likely to raise rates in an emergency. He continued, “The governor is aware of the necessity to maintain price stability but not at the expense of growth.
