FX intervention seen to strengthen peso

The peso will likely strengthen against the dollar for the rest of the year—and into 2015—amid expectations that the Bangko Sentral ng Pilipinas (BSP) would accelerate its monetary policy tightening to slow the pace of price increases in the local economy.

In a research note published last Friday, Credit Suisse predicted that the peso would move to 44 to a dollar in three months and eventually to 43 to $1 in 12 months.

This represents a more bullish view by the global investment banking giant on the peso-dollar rate from its previous forecast of P45.50 and P45.80 to the greenback for the three- and 12-month periods.

“Domestic fundamentals have improved in the Philippines, creating more support for the currencies than we previously anticipated,” said the report authored by Credit Suisse vice president Santitarn Sathirathai and associates Michael Wan and Trang Thuy Le.

Because of looming inflationary risks, the trio predicted that the central bank would intervene more aggressively in the foreign exchange market, going forward, to quell inflationary pressures.

They added that recent monetary policy statements by the BSP clearly indicate that regulators have become more hawkish in their stance.

“The BSP also highlighted financial stability concerns due to strong liquidity growth, upside risk to inflation and that scope to keep policy rate has narrowed,” Credit Suisse said.

Because of the growing threat of inflation, the investment bank now expects regulators to raise banks’ reserve requirements by another 100 basis points to 21 percent. It also moved forward its prediction for a half-percentage-point increase in the special deposit account (SDA) rate to the second semester of this year, from its earlier prediction of 2015.

“We still see no change in the policy rate in 2014, but now think that the central bank would raise the rate by 50 basis points in the first half of 2015, rather than the second half,” it added.

More importantly, Credit Suisse expressed bullishness on the growth of the Philippine economy this year, along with that of Malaysia—the two strongest economies in the Asean region in 2014, it predicted.

This year, it expects Philippine gross domestic product to grow by 7 percent due to the resilience of domestic demand, higher than economists’ consensus of a 6.4-percent GRP growth for this year.

“While higher interest rates in the Philippines will likely affect GDP growth, given that monetary policy works with a lag, the impact will most likely be felt next year,” Credit Suisse said.

“BSP Governor [Amando] Tetangco Jr.’s latest comments that the central bank is not committed to preset policy and that ‘there is nothing on the table right now’ may give the impression of a premature end to the tightening cycle,” Credit Suisse said. “However, we think this will only represent a pause.”

Ultimately, strong growth and high inflation will force BSP’s hands into tightening again soon, the investment bank said.