The peso is expected to settle at 50 against the US dollar before the end of the year, as the US Federal Reserve prepares for an interest rate hike, a bank economist said over the weekend.
Bank of the Philippine Islands’ lead economist Emilio Neri Jr. said in a report the peso would more likely hit 50 than 45 against the greenback through 2017.
“Despite recent appreciation pressure, the peso is expected to revert towards the 50 handle as the Fed raises rates within the year with more follow-through actions in 2017 despite market expectations for the opposite,” Neri said.
“The most recent dot plots show that all members of the FOMC [Federal Open Market Committee] are in favor of at least one rate hike, which could force the peso to weaken towards the end of the year,” Neri said.
The US Fed kept interest rates unchanged last week, but hinted it could still raise rates for the remainder of 2016. Reports said six of the Fed’s 17 policymakers projected just one increase this year.
Fed Chair Janet Yellen said there was a need to see clear signs of economic strength before lifting rates. A sharp slowdown in US hiring in May cast doubts about the strength of the labor market.
The Fed also said the economy would grow only 2 percent this year and in 2017, or 0.1 percentage point lower than previously forecast for each year. Yellen was uncertain on the timing of the rate increase.
Neri said the plan of incoming President Rodrigo Duterte about aggressive infrastructure spending would invoke a sharp increase in importation of capital machinery which would lead to a bump up in dollar demand, also causing the peso to weaken.
He said traditional sources of dollar liquidity might remain this year, such as remittances from overseas Filipinos and business process outsourcing receipts, “but these may not be enough to compensate for the surge in importations.”
“All in all, the peso is seen to reverse from its recent trend to end the year closer to the 50 handle than 45,” Neri said.
The peso closed at 46.445 per greenback on June 17, weaker than 46.43 per dollar a day ago.
Economists from First Metro Investment Corp. and University of Asia and the Pacific earlier projected that the peso might trade between 48 and 49 a dollar this year, taking into consideration the volatility in the global financial markets.
Monetary authorities in the latest inter-agency Development Budget Coordination Committee
meeting revised the 2016 peso-dollar trading average forecast to 45 to 48, from an earlier estimate of 43 to 46.
Neri said the monetary policy of Bangko Sentral ng Pilipinas might remain neutral for an extended period, opting to utilize the interest rate corridor and term deposit facility before it decided to hike policy rates.
“Thus, with inflation seen to be well behaved and liquidity still manageable, the BSP may not need to resort to hiking policy rates to safeguard its inflation target. This would lead to bouts of peso weakness, which the BSP would look to smooth out but ever mindful to keep the local
unit in the middle of the Asean pack,” Neri said.