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Thursday, March 28, 2024

Strong peso helps steady inflation

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The economic recession in 2020 would have translated into a weak currency—the usual barometer of a nation in crisis. But far from it, the Philippine peso has strengthened and weathered the pandemic storm.

The peso advanced more than 5 percent against the US dollar in 2020, helping tame inflation rate, especially the prices of sensitive imported products such as food and petroleum.

It was one of the most stable Asian currencies last year despite the headwinds from the domestic and global fronts, especially the prolonged COVID-19 pandemic, according to the Department of Finance.

BSP Governor Benjamin Diokno

“The Philippine peso remained firm, appreciating from year-end 2019 level. In 2020, the Philippine peso was in the middle of the pack among the nine currencies in Asia that maintained their value against the US dollar,” the DOF said.  

The peso appreciated 5.18 percent against the US dollar last year, or in the middle of the pack of nine Asian currencies, including the Taiwan dollar, Chinese yuan, Taiwan dollar, Korean won and Japanese yen, which rose 6.33 percent, 6.26 percent, 6.07 percent, and 4.94 percent, respectively.

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BSP Governor Benjamin Diokno said the peso remained resilient and stable amid the pandemic. “The local currency has also performed better compared to other Southeast Asian currencies and appreciated vis-à-vis the US dollar along with the Chinese yuan, Taiwanese dollar, South Korean won, and the Japanese yen, year-to-date,” Diokno said.

He cited analysts’ expectation that the peso would remain strong in the near term and maintain its resilience as one of Asia’s top-performing currencies.

“The peso’s strength can be attributed to sound macroeconomic fundamentals characterized by a benign inflation environment, a strong and resilient banking system, prudent fiscal position and a sufficient level of international reserve buffer,” said Diokno.

The peso was stable at 48 against the dollar in January 2021.

ING Bank Manila senior economist Nicholas Mapa said the Bangko Sentral ng Pilipinas would likely allow the peso to sustain its appreciation against the greenback in 2021 to offset the expected uptick in inflation rate.

“In 2021, the peso is on an appreciation path, helped by the current Fed stance and also as import demand fades sharply due to the pandemic, in stark contrast to 2018 wherein imports ballooned to historical highs,” Mapa said.

He said as the BSP would likely continue to keep its eye fixed on the growth objective given the dire needs of the economy and ruling out early rate hikes in 2021, the only card it could play to combat inflation in 2021 would be to let the currency appreciate.

“With BSP not likely open to hiking rates this time around as it would derail what little growth momentum left in the economy, perhaps if ever BSP would be forced into action, allowing the currency to appreciate would be their only play available,” he said.

Inflation picked up to a two-year high of 4.2 percent in January from 3.5 percent in December 2020 because of the uptick in food prices and transport costs, data from the Philippine Statistics Authority showed.

The January print breached the inflation target band of 2 percent to 4 percent set by the BSP for 2021 and was the fastest price increase in two years since it hit 4.4 percent in January 2019.

The faster inflation in January 2021 was driven by the increase in the price indices for food items, particularly meat and vegetables. Food inflation accelerated to 6.6 percent, while non-food inflation was unchanged from the previous month at 2.3 percent. Meanwhile, faster price adjustments were also recorded in restaurants, miscellaneous goods and services, and transport.  

The National Economic and Development Authority said the rising food inflation could be linked to the outbreaks of African Swine Fever, additional logistics and transportation costs of sourcing pork to augment supplies throughout the country, the closed fishing season across several regions and the damage in the countryside from typhoons and floods last year.  

Diokno said that despite the uptick in consumer prices, it was still consistent with the BSP’s assessment of a transitory increase in inflation in the first half. “Average inflation is still seen to settle within the 2 percent to 4 percent target range over the policy horizon,” Diokno said in a statement.

He said the uptrend in inflation was seen as temporary. “The Monetary Board will consider recent price developments, particularly in global commodity markets, along with the fourth quarter 2020 GDP outturn in its assessment of the monetary policy stance in its meeting on Feb. 11, 2020,” Diokno said.

Acting Economic Planning Secretary Karl Kendrick Chua said the government’s priority is to ensure that food supply is adequate so that households affected by COVID-19 and the quarantines would not be doubly affected by the increase in food prices.

He said allowing more importation of key agricultural products  that in the interim, while adhering to strict safety protocols to prevent entry of contaminated products, would help augment supply and manage inflation.

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