Low rates seen pressuring PH peso to further weaken

The Philippine peso is expected to further weaken amid the decision of the Bangko Sentral ng Pilipinas (BSP) to keep key interest rates at a record low 2 percent despite accelerating prices of basic commodities and the rising rates of major central banks.

ING Bank senior Philippines economist Nicholas Mapa said the continually accommodative policy stance of the BSP, amid tightening moves among influential central banks including those in the United Kingdom and the United States, was fueling the depreciation of the peso, a scenario that shows similarities with 2018.

“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.

Capital outflow

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 kicked up to 6.7 percent. As a result, Mapa said the BSP raised its policy rate by 175 basis points in a span of just eight months as funds flowed out of the country to take advantage of higher yields or less risky investments abroad.

Mapa said in a commentary the continued policy divergence between the BSP and the rest of the world, particularly the US Fed, “has not gone unnoticed.”

The economist said that on April 5, the peso gained by 0.9 percent but lost ground by 0.96 percent earlier this week.

Mapa said the upswing was likely due to inflows related to a recent dollar bond issuance but overall risk sentiment remains fragile as such support dissipated.

“BSP has retained their dovish tone, suggesting rate hikes would be delayed until the second half of the year [while] global central banks have moved swiftly and decisively to combat inflation,” he said.

“Should present trends continue and the Fed pushes through with an aggressive tightening cycle, we could very well have the BSP and the Fed at parity by year-end,” he added.

In March, the US Fed raised the federal funds rate by 25 basis points to bring the target range to between 0.25 percent and 0.5 percent.

Analysts predict that the American central bank might raise the key rates in their next meeting in May, by an additional 50 basis points to within 0.75 percent and one percent.

Also last week, BSP Governor Benjamin Diokno said the central bank continued to have a wide arsenal of policy instruments to respond to possible adverse impact of external shocks.

He added that the BSP supported the timely implementation of direct nonmonetary measures to mitigate the impact of the Russia-Ukraine conflict, which he also described as “limited” and “muted.”

“Previous episodes of supply-side shocks in the country have shown that these are best addressed through timely nonmonetary policy interventions that could ease direct domestic supply constraints and prevent second-round effects on prices,” Diokno said, referring to hikes on wages and transport fares.