BSP’s dovish stance causing peso weakness

The continually accommodative policy stance of the Bangko Sentral ng Pilipinas (BSP), amid hints that influential central banks including those in the United Kingdom and the United States will go for tightening soon, is fueling the depreciation of the peso, a scenario that shows similarities with 2018, according to ING Bank.

The bank’s senior economist in the Philippines, Nicholas Mapa, said in commentary that in 2018, inflation quickly heated up due to supply issues related to rice.

Rising inflation is the very factor that, then as now, was and is prompting the Bank of England and the US Federal Reserve to turn hawkish, Mapa said.

But also, then as now, the BSP was and is opting to remain dovish and signaling no changes to its overnight borrowing rate, which the Monetary Board kept at a record-low 2 percent in a policy meeting held last week.

The Monetary Board explained that the decision was made given a manageable inflation environment and emerging uncertainty surrounding domestic and global growth prospects.

“The last time there was this much policy divergence between the BSP and the [US] Fed was back in 2018, and as 2022 continues to unfold, we are starting to see how the two years are shaping up to be similar and how they appear to differ,” the economist said.

Mapa said the Philippine peso had come under pressure in 2022 and was the region’s second worst performing currency, weakening by 0.74 percent as of Feb. 21.

He added that this weakness is partly attributed to the Philippine current account—a reckoning of the country’s transactions with the rest of the world—swinging “from a surplus in 2020 to a deficit for the most part of 2021 and possibly into 2022.”

Mapa noted that in 2018, with the BSP’s dovish stance while the “influencers” were hawkish, the peso weakened by more than 9 percent and inflation rose to 6.7 percent. INQ