Hike rates

BSP ready to raise rates by 50 basis points as peso nears record high against dollar


By Keisha B. Ta-asan

THE BANGKO SENTRAL ng Pilipinas (BSP) is ready to raise its benchmark rate by 50 basis points (bp) in August as the Philippine peso broke through the P56 level against the US dollar on Thursday to approach its record low.

BSP Governor Felipe M. Medalla said on Thursday that the US Federal Reserve’s recent hawkish stance had put “strong depreciating pressures” on global currencies such as the peso.

“If such pressures go unchecked, they could add to the already high domestic level offlationary pressures,” he told reporters via Viber.

The peso closed at 56.06 pesos against the dollar on Thursday, down 39 centavos or 0.7% from the previous day, according to data from the Philippine Bankers Association.

It’s the worst of the peso Ifnish since September 27, 2005 at P56.30 per dollar and only 39 centavos off the record low of P56.45 on October 14, 2004.

“The BSP is ready to be more aggressive in raising its policy rate, compared to its initial progressive position. In particular, BSP is ready to raise its policy rate by 50 basis points by August,” Medalla said, referring to the August 18 meeting.

The Monetary Board has raised benchmark interest rates by a total of 50 basis points so far this year via 25 basis point hikes at its May 19 and June 23 meetings, bringing the rate manager at 2.5%.

Mr. Medalla said earlier this week that the BSP could raise rates by at least 100 basis points 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 inflation is too high, even if the causes are impervious to BSP’s policy instrument kit, a monetary policy response may be needed,” Medalla said Thursday.

“It is not prudent to allow factors that significantly affect the exchange rate to worsenflation which is already high. Even more, if we cannot exclude that we could miss our 2 to 4% (inflation), not only this year, but also next year,” he said.

The BSP leader said they were “ready to take further political steps, if necessary.”

“He will also continue to support and advocate for non-monetary actions by other government agencies to further containflationary pressures that could spread until 2023,” he added.

The peso opened Thursday’s session at 55.90 pesos against the dollar. Its intraday best was at P55.78 while its weakest performance for the day was at P56.09 against the greenback.

Traded dollars slipped to $1.11 billion on Thursday from $1.24 billion on Wednesday.

The peso has weakened 5.06P or 9.92% from its close of 51P per dollar on December 31, 2021.

The peso continued to weaken after hawkish signals from the minutes of the U.S. Federal Reserve’s latest meeting, the chief economist at Rizal Commercial Banking Corp said. Michael L. Ricafort.

The U.S. Federal Reserve has pledged to keep raising interest rates longer to curb soaringflation, minutes of the political meeting of June 14 and 15. Markets are anticipating another 75 basis point hike at the next Fed meeting.

“General USD (US dollar) strength has dominated trading this week as investors seek a safe haven amid recession fears,” said Nicholas Antonio T. Mapa, senior economist at ING Bank NV Manila.

“As a result, most emerging market (EM) currencies weakened sharply against the USD. United States,” Mr. Mapa said.

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

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

“The dollar index (DXY) has just reached an all-time high since the beginning of the year, meaning that overall the USD has appreciated against the major currencies. This has contributed to the current depreciation of the peso,” China Banking Corp. chief economist Domini S. Velasquez said in a Viber message.

“Going forward, the peso is expected to trend lower through the third quarter due to a growing trade deficit and aggressive rate hikes from the Federal Reserve,” Velasquez added.

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

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

“Domestic developments have also contributed to PHP weakness, particularly the sharp rise in the country’s import bill, due to the inflated dollar value of commodities and an actual increase in import volumes as let the economy reopen,” Mapa said.

“With the peso on its heels, the BSP has a long and agonizing wait until August 18, 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 rise to P55.95 to P56.15 against the dollar.