Fed hike to weigh on BSP policy as peso slips to new 12-year low

The decision of the US Federal Reserve to raise interest rates in the world’s largest economy will weigh on the Bangko Sentral ng Pilipinas’ (BSP) upcoming discussions on further tightening monetary policy to combat stubbornly high local inflation.

In a text message, BSP Governor Nestor Espenilla Jr. said the US central bank’s latest move to hike its key Fed funds rate by 25 basis points—which historically has the tendency to weaken the peso by inducing investors to shift their funds to dollar-denominated assets—
would be “a relevant development to consider when Monetary Board reviews the policy stance.”

The BSP raised its overnight rates by 25 basis points last month in response to the spike in domestic prices of consumer goods and services that brought the inflation rate to a five-year high of 4.6 percent in May.

Some market watchers and economists believe that another interest rate hike is needed to definitively address the inflation threat, but the central bank remains noncommittal to another round of policy tightening.

The latest US Fed rate hike, however, will provide the BSP additional impetus to hike rates to buttress the peso and, consequently, help contain inflation.

“As a small, open economy, we can’t really be oblivious to Fed actions,” Espenilla said.

On Thursday, the peso slipped to a fresh 12-year low of P53.27 to the dollar from the previous trading session’s close of P53.23. This was its weakest since June 29, 2006, when the currency hit P53.55 to a dollar.

Total volume was heavy with $796.45 changing hands, compared to last Wednesday’s volume of $773.17 million.

Traders said the peso’s weakness was due to Thursday’s US rate hike and the weak trade data released by the government last week.

Espenilla earlier said the policymaking Monetary Board “will be evaluating a very rich and broad range of information at its policy meeting next week.”

“We’ll be examining closely all the potential drivers of future inflation through the various transmission channels as affected by global developments, expectations formation, and uncertainty,” he said. “It’s a fairly complex environment that we need to navigate.”

The BSP will have its policy setting meeting on June 20.