The peso is expected to stabilize in the remaining months of the year at the current level of about 43.30 against the US dollar before it starts strengthening again in 2012, according to DBS Group.
The Singapore-based institution said in a research note that the local currency would appreciate steadily from January to September next year, settling at about 41.30 to the dollar at the end of the period.
“Relative fundamentals continue to favor the Philippine peso over the US dollar longer term,” DBS said.
The group noted that the Philippines recently received two single-notch debt rating upgrades, while the United States lost one of its AAA ratings.
“The country has policy room to support growth if US and European Union worries further hurt the world economy,” DBS said. “The central bank has, in prioritizing growth over inflation, left the door open for rate cuts, if necessary.”
DBS further noted that the US Federal Reserve pledged in August to keep rates at exceptionally low levels of between zero and 0.25 percent well into 2013.
Meanwhile, the Bangko Sentral ng Pilipinas last hiked rates by 25 basis points to 4.5 percent in May.
The group believes that the lower-than-expected second-quarter GDP growth figure will put economic concerns firmly on the BSP’s agenda and that, with weak investment and export numbers, monetary normalization will be pushed back.
“Moreover, using 2000 as the base year, the consumer price index for 2011 is likely to be within BSP’s targeted range of 3-5 percent, implying that the [BSP] can afford to avoid further tightening in the short term,” DBS said, reiterating that it sees no further rate hikes this year.
Instead, DBS expects one 25 basis-point rate hike in the first quarter and again in second quarter next year, considering that the credit cycle is still on an upswing and upward pressure on prices are expected to materialize in early 2012.
“The government can also afford to deliver more fiscal stimulus (since) the budget deficit totaled P44 billion in the first seven months, well below the P300 billion for the whole of 2010,” the group said.
“Put simply, it is America, and not the Philippines, who is the sick man today,” DBS added.