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BSP seen increasing rates to tame peso depreciation

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Bangko Sentral ng Pilipinas may consider raising interest rates if the peso continues to weaken further against the US dollar, DBS Bank of Singapore said Thursday.

DBS said in a report the peso declined 3.9 percent against the dollar this year, making it the worst performing unit in the region.

“From an export competitiveness perspective, the central bank’s stance on the currency may make sense for now. Exports of manufactured goods have grown by more than 12 percent in the year-to-date, strong compared to the 1.8 percent posted in full-year 2016,” it said.

DBS said the weak peso might have slowed down the pace of investment growth. Imports of capital goods, for instance, grew just 3 percent so far this year, compared to 46.6 percent and 21.4 percent in 2016 and 2015,  respectively.

DBS said it was interesting to see if the Bangko Sentral would maintain its stance going into 2018. The regulator has been holding rates steady throughout this year amid a rather soft inflation patch, especially in the mid-year.

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A manageable inflation environment and robust domestic economic growth prompted the Monetary Board of Bangko Sentral to maintain the current policy settings steady in its meeting on Sept. 21, 2017.

It retained the interest rates at 3.5 percent for overnight lending, 3 percent for overnight borrowing and 2.5 percent for deposit facilities.

“But inflation has bounced back to a 3-year high of 3.4 percent [year-on-year] in September 2017, up from the year’s low of 2.7 percent in June 2017. Rate hikes may well be an option if the central bank start to get uncomfortable with the pace of peso weakening,” DBS said.

The peso on Wednesday weakened to a new 11-year low of 51.77 against the US dollar, pulled down mainly by the country’s widening trade deficit and the speculations on who will be the next Federal Reserve chairman.  It settled at 51.75 a dollar Thursday.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said there was fundamental demand for US dollar for imports, outward investments and debt servicing.

“Beyond these, it looks like the market is betting on a hawkish candidate for US Fed chairmanship plus the recent positive news about the US economy. All of these have resulted in a strong US dollar,” he said in a statement.

Guinigundo said markets and investors should not be overly concerned about these peso movements because the peso was “flexible enough” to reflect the necessary adjustments in the macroeconomy to restore equilibrium.

“This is not the first time that we are hitting these lows in the peso dollar rate. With exports continuing to rebound and with support from strong remittances and BPO receipts, we should see some mitigation in both the current account and the exchange rate,” he said.

“We have seen how the peso had appreciated to nearly P40 a dollar to as low as P55 to a dollar but the economy remained strong, stable and resilient. There is much more than an exchange rate gyration,” Guinigundo said.

Guinigundo said the strength of the greenback was the effect of higher corporate demand for imports and trade financing.

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