BSP urged to stay aggressive on rates

The Philippine peso could again start depreciating against the US dollar if the Bangko Sentral ng Pilipinas (BSP) will go slow on increasing its key rates following improved economic data from the United States.

Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, said the peso was again the weakest currency among those in the five biggest emerging economies of the Association of Southeast (SE) Asian Nations.

Citing data from Bloomberg, Neri said the peso had lost 7.6 percent of its value against the US dollar since the start of this year. The peso started 2022 at 51:$1 and closed spot trading at 55.61:$1 on Aug. 12.

Over the past 32 weeks, the Vietnamese dong, Indonesian rupiah, Thai baht and Malaysian ringgit fared better than the local currency.

During that period, “the Philippine peso underperformed due to the [BSP’s] dyed-in-the-wool dovish stance [although] an off-cycle hike and a shift in rhetoric has provided reassurance,” Neri said.

On July 14 at an unscheduled policy meeting, the Monetary Board (MB) raised the BSP’s overnight borrowing rate by a hefty 0.75 percentage point to 3.25 percent, ending a dovish period of two previous 0.25-ppt hikes in the second quarter.

Increasing possibility

Earlier this month, BSP Governor and MB chair Felipe Medalla said the 6.4-percent inflation in July “raise(d) the possibility” of a 0.5-ppt rate hike on Aug. 18, the next calendared policy meeting.

“We think BSP will need to hike the [policy] rate by 50 basis on Aug. 18 despite slower US inflation and slower second-quarter growth of the Philippine gross domestic product,” Neri said.

He said the BSP might even be compelled to resort to another off-cycle rate increase if the US Federal Reserve goes for another aggressive hike in September, especially as Fed officials still sound hawkish even after reports of inflation having slowed in the United States.

Another aggressive hike by the American central bank could deplete the Philippines’ foreign exchange reserves rapidly in the coming weeks, Neri said.

Forex reserves

Earlier this week, the BSP said its gross international reserves went down for the fifth month in a row to sink below the $100-billion mark at $98.8 billion at the end of July.

Also, Neri said Philippine inflation appears to have not yet peaked as global commodity prices have not fallen fast enough to temper inflation expectations here.

He noted that rising Philippine inflation, driven by the depreciation of the peso, was a key drag to GDP growth in the second quarter.

This can be avoided by a bigger rate hike on Aug. 18, which would also help the BSP provide a comfortable differential between policy rates in the Philippines and the United States —and help rebuild Philippine foreign exchange reserves.

Currently, US federal fund rates are at 2.25 percent to 2.5 percent, only 0.75 to one ppt lower than the BSP overnight rate.