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Peso may further weaken as BSP tends to keep policy rates steady

/ 05:08 AM March 19, 2018

The Bangko Sentral ng Pilipinas (BSP) is likely to keep its interest rates steady on Thursday and for the rest of the year as inflation trends lower but there’s risk of the peso depreciating significantly, a senior economist at Dutch financial giant ING said.

Joey Cuyegkeng, ING Philippines economist, said the inflation-targeting BSP would likely release inflation forecasts for consumer price indices of 2006 and 2012 in its upcoming monetary policy meeting on March 22.

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“They will probably show inflation peaking around mid-year before trending lower in late 2018 and returning to the target range of 2-4 percent by first half 2019,” Cuyegkeng said.

“With these inflation expectations over the policy horizon, and with a monetary policy lag of 12 to 18 months, we find no compelling reason to tighten anytime soon,” he said.

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The BSP’s overnight borrowing rate has been steady at 3 percent since June 2016. The last time the BSP tinkered with the monetary settings was in May 2016 when it brought down the policy rate to the all-time low seen today.

“The risk to this steady policy rate path is a significantly weaker Philippine peso,” he said.
“A decline of 4-5 percent generates not only momentum but also fears of the exchange rate’s impact on inflation,” he added.

On Friday, the peso closed at 51.93 against the dollar. At end-2017, the peso closed at 49.923 to $1.
The peso has been depreciating against the dollar since 2013.

“Constant and significant direct intervention in the currency market could establish a downward trend of the FX (foreign exchange) reserves, which may stoke fears of further weakness,” Cuyegkeng said.

“The central bank may eventually turn to monetary policy and/or macroprudential measures to support the currency,” he added.

The BSP is now using 2012 as base year for the consumer price index (CPI) whereas consensus forecasts are still mostly based on CPI base year 2006.

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TAGS: Bangko Sentral ng Pilipinas (BSP), Business
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