The peso pierced the P55 level to the US dollar on Monday, June 27, at its intraday peak before regaining lost ground to close stronger at P54.78.
With the peso finally showing some strength versus its Friday close of P54.985, market watchers are now anticipating a higher central bank rate hike in August of as much as 50 basis points (bps) to temper both inflation and peso depreciation.
Moody’s Analytics in its weekly commentary said the peso is reacting to the “moderate rate increases stand (of the Monetary Board) in contrast to a hawkish US Federal Reserve” and this reflected in the currency which was losing its value since June 10.
With high inflation expected to be the norm until 2023, Moody’s said the Bangko Sentral ng Pilipinas (BSP) is “more likely to go with a 50-basis point hike come August than another 25-bps more.”
Moody’s said the peso plunged to a 16-year low versus the US dollar after US interest rates were increased by 75 basis points last June 15, thus further widening the yield differential between US treasuries and local government bonds.
“A bloated import bill and widening current account deficit in May have also put downward pressure on the peso. Outflows of capital suggests investors lack patience with the BSP’s pace of monetary policy normalization relative to the Fed’s brisk clip,” said Moody’s.
Incoming BSP governor, Monetary Board member Felipe M. Medalla, has said that another 25 bps rate increase is pending when the Monetary Board policy meeting is held on Aug. 18. This will bring the policy rate to 2.75 percent after two 25 bps adjustments last May 19 and June 23.
However, Moody’s said since the inflation rate which is only expected to return to within the two percent to four percent target in 2024, this could convince the BSP to go for a higher 50 bps rate increase.
The average inflation forecasts for 2022 is five percent, 4.2 percent for 2023 and 3.3 percent for 2024. The higher inflation projections come from upside pressures from elevated fuel costs, the shortage of domestic fish supply and additional transport fare hikes due to the rising oil prices.
Moody’s noted that the inflation environment in the country is “uncomfortably high”. It said the “odds of a 50 bps rate hike in the next meeting in August have increased, as the central bank will want to quell inflation and arrest second-round effects.”
Meanwhile, BSP officials said the peso is not inherently weak but similar with other currencies in the region, the local currency is depreciating due to the strength of the US dollar. The US policy normalization is favoring a strong US dollar.
Since the start of 2022, the peso has depreciated by P3.78 or by 7.4 percent. The peso-US dollar rate finished at P50.999 on the last trading day of 2021.
From its Friday close of P54.985, the local currency opened at P54.93 on Monday morning. It re-gained some of its value at P54.81 before hitting a high of P55.15. The spot market was traded with a volume of $1.179 billion.
The last time the exchange rate was at P55 was on Oct. 27, 2005 when it closed at P55.08:$1. The weakest peso was at P56.45 in 2004, during the Arroyo administration.
The BSP, which implements a free-floating exchange rate, will leave it to the market to determine the peso rate but it is prepared to intervene to protect the currency against speculative attacks which usually happens when there are excessive short-term volatility in the spot market.