British banking giant HSBC expects the peso to pull back to a low of 43 to the dollar before settling at 42 by yearend because of pressure from rising inflation.

?The rapid rally of the peso has probably come to an end,? Hong Kong-based HSBC economist Frederic Neumann said.

Neumann said financial markets had become more selective on Asian currencies, buying or selling them on the basis of inflation prospects, as opposed to the across-the-board buying that resulted in a strong regional rally in the past few years.

?The criterion for selection is inflation and the likely monetary policy response to it,? he said.

He said the Singapore dollar was still rising against the US dollar because its central bank had tightened interest rates aggressively. And ?Malaysia doesn?t have a strong monetary response, but it doesn?t have strong inflation because of subsidies so the currency is being bought,? he added.

?We are seeing softness in countries where there?s perceived reluctance of the central bank to tighten rates,? Neumann said, noting this was why the Korean won became the current worst-performing Asian currency.

In the Philippines, he said, the central bank, Bangko Sentral ng Pilipinas (BSP), might have to increase its benchmark interest rate, the overnight borrowing rate, by 75 basis points this year to curb inflationary pressures, which were also partly driven by strong consumer demand.

He said the BSP might release some of the liquidity locked up in its Special Deposit Account (SDA) facility, given rising political pressures?with Congress set to probe the SDA as a mopping-up instrument?but would have to compensate by raising interest rates.

But with the national government planning to issue more domestic debt, he said the BSP would have room to free up some liquidity from the SDA.

Despite recent inflationary pressures, Neumann said, there is no reason for the peso to fall to 44 or 45 to the dollar, as the BSP has bolstered its level of foreign exchange reserves over the past few years when the peso was rising sharply.

?I think we?ve reached a sort of a plateau. We might probably see some weakness, not dramatic but we are not going to see a further dramatic rise,? Neumann said.

He added that the Philippines had turned the corner over the last few years and could hurdle current challenges caused by rising inflation in the region, in turn partly due to the US Federal Reserve?s aggressive interest rate cuts that had the effect of ?exporting? inflation to the rest of the world.

?What would need to happen is for interest rates to rise to cool down the inflation pressures but because the US Fed is easing interest rates, it?s more difficult to tighten. Because of that, we sense reluctance in central banks across the world,? he said.

But Neumann ruled out a situation where inflation would go out of hand in the country. He projected average consumer price increases to peak at 8.5-9.00 percent this second quarter, and average at 6.5 percent for the full year.

The government is targeting to keep inflation rate at a maximum of 5.00 percent, but even the BSP has conceded that this target limit may be breached. Rising costs of rice and oil imports would likewise result in higher deficits that could weigh down on the peso.

Neumann said foreign exchange remittances from overseas Filipino workers would likely remain strong this year and somehow shield the domestic economy from adverse effects of a US economic slowdown.

?Most remittances come from emerging markets. About 50 percent comes from the Middle East and the last time I checked with oil prices at $120 per barrel, the Middle East won?t slow down,? he said. With editing by INQUIRER.net