The 75-basis-point (bp) increase to 3.25 percent of the Bangko Sentral ng Pilipinas’ (BSP) policy rate is expected to help quell or at least calm down the volatility of Philippine peso’s value against the US dollar, although the initial impact was subdued.
The peso opened spot trading on Thursday at 56.30:$1 before the Monetary Board announced their off-cycle rate hike.
For the second time this week, the local currency touched its all-time weakest position at 56.45:$1, before closing at 56.15 to gain from the previous trading day’s close of 56.26 against the greenback.
On Thursday morning, the peso’s intraday strongest was 56.05. In the afternoon, this firmed up to 55.98:$1.
Michael Ricafort, chief economist at the Rizal Commercial Banking Corp., said the surprise, off-cycle rate hike was meant to support or at least stabilize the peso exchange rate, as part of the BSP toolkit related to the exchange rate vis-a-vis the inflation-targeting framework and price stability mandate.
“This would also help better manage or anchor both actual inflation and inflation expectations,” Ricafort said, adding that the hike was also a preemptive move on a possible large rate hike by the United States Federal Reserve, expected at 75 bps to 100 bps on July 27.
“More local policy rate hikes are still possible, if needed, as a function of any further [US] Fed rate hikes to bring down elevated US inflation,” he said.
“Any further local policy rate hikes would also be partly a function of how the peso exchange rate behaves and the impact on inflation as well as actual inflation data, going forward,” he added.
In a media briefing, BSP Deputy Governor Francisco Dakila Jr. reiterated that the central bank was not aiming for any specific level of the foreign exchange rate.
“Many other central banks are also on the tightening board and in this instance, as we had always stated, we had been normalizing our policy stance [coming from] the significant adjustments that were done during the pandemic,” Dakila said.
According to the Bank of the Philippine Islands (BPI), a substantial peso depreciation due to the Philippines’ growing import bill as well as the hawkish US Fed policy might force the BSP to make more adjustments in their policy settings.
“We continue to expect peso depreciation in the medium term as imports will likely increase further due to the recovery of the economy,” BPI said. “Dollar demand may pick up and keep the exchange rate above the 54 level.”