Inflation-wary traders dump peso despite likely BSP rate hike on Thursday

AFP FILE PHOTO

The peso slid to yet another 12-year low on Tuesday as the market girded itself for the lingering effects of stubbornly high prices despite the central bank’s vow to act aggressively against inflation when the Monetary Board meets later this week.

The local currency ended the trading session at P54.31 to a dollar which is its lowest close since November 22, 2005. The peso’s last trade on Tuesday was lower than the P54.23 of the previous session. It traded as low as P54.50 earlier in the day before intervention from the Bangko Sentral ng Pilipinas (BSP) moderated some of the losses, traders said.

“Please note that regulators said they are willing to apply ‘strong monetary action’ to temper inflation,” said one bank treasurer who requested anonymity, referring to earlier statements made by central bank officials.

“If it turns out to be not as strong as they promised, we will likely see the peso weaken further,” he added.

The Monetary Board will convene on Thursday to decide whether to raise interest rates further given the 6.4-percent inflation rate recorded last month, the highest in nine years. Market watchers were initially expecting only a 25-basis point hike, but the agricultural damage caused by typhoon “Ompong” (international name: Mangkhut) is expected to push commodity prices higher which may, in turn, warrant a stronger anti-inflation response from the BSP.

The BSP hiked its key overnight borrowing rate by 50 basis points at its last meeting in August in a big to temper what it described as the beginnings of second round inflationary effects taking hold in the local economy.

Previous to this, it also hiked interest rates in two successive 25-basis point moves, but is widely perceived to have been late to respond to the inflationary threats that began to emerge as early as January of this year.

Abacus Securities research head Nicky Franco pointed out that the peso’s weakness is being caused by worries about the inflation rate and is, in fact, happening despite expectations that the BSP will raise rates by 50 basis points on Thursday.

“Forecasts of 7-percent inflation are coming out which, if proven correct, means the Philippines’ real interest rate is going further into negative territory,” he said. “As a result, most foreign investors still see the BSP as behind the curve.”

On top of worries about the country’s inflation rate, another banker said the escalating trade tensions between the US and China were contributing to the peso’s weakness, since less trade between the two largest economies in the world will likely impact Philippine exports as well, especially intermediate electronic goods which are sold to factories in China for eventual re-export to the US.

“The bottom line is this: if the central bank doesn’t hike [interest rates], the market will continue to push the peso to P54.50,” the treasurer said.

On the trading platform of the Bankers Association of the Philippines, a total of $668.35 million changed hands, similar to the previous day’s volume of $670.6 million.  /kga