The peso depreciated to a fresh all-time low of P56.99 vis-à-vis the US dollar on Monday, Sept. 5, after briefly touching P57 intraday, but the central bank maintained that the local currency is still the "least" depreciated currency.
From its Friday close of P56.77, the peso lost another 22 cents on Monday as the market awaits additional policy rate hikes from the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP) this month.
Based on Bankers Association of the Philippines data, the weighted average exchange rate was at P56.94 on Monday. The spot market volume totalled $976.45 million from $936.95 million last Sept. 2.
From its end-2021 close of P50.99, the local currency’s value has fallen by P6 or 11.8 percent as of Sept. 5.
BSP Governor Felipe M. Medalla said the peso is however still the “least” depreciated currency after the last two Monetary Board – the BSP’s policy-making body -- rate increases.
“It’s a very strong dollar,” said Medalla in a Viber message. “Compared to after we did 75 bps (basis points) and after we did the follow up 50 bps on Aug. 18, the peso is actually one of the least depreciated currency,” he said.
A graph he provided showed that from July 14 when the BSP implemented an off-cycle 75 bps rate hike until Sept. 2, the peso depreciated only by 1.16 percent compared to the Korean won which depreciated by 2.96 percent, Taiwan dollar by 2.15 percent, Chinese yuan by 2.35 percent and the British pound which lost 2.51 percent versus the US dollar.
From Aug. 18 when the BSP raised the key rate by 50 bps, the peso depreciated by 1.62 percent compared to the British pound which depreciated by 3.96 percent and the Japanese yen by 3.37 percent. The Korean won continued to lose ground by 2.20 percent vis-à-vis the US dollar, and the Taiwan dollar by 1.84 percent.
Medalla said the upcoming US Federal Reserve rate hikes are supporting the greenback since rising US rates is a dollar positive. “The market is expecting another 75 bps hike by the Fed, which made the dollar stronger,” he noted. The US Federal Open Market Committee will meet on Sept. 20 to 21.
The local market is likewise projecting another BSP rate hike this month but probably not as much as 75 bps. The BSP is dealing with the peso depreciation by raising the policy rate and through spot market interventions. Both actions also keep inflation from being disanchored against the BSP’s inflation expectations.
Medalla said earlier that he will not rule out further tightening. After the most recent 50 bps rate hike last Aug. 18, the next policy rate meeting is Sept. 22, followed by two more policy meetings on Nov. 17 and Dec. 15.
More policy rate increases will ensure the BSP would be able to re-anchor inflation expectations and bring it down to below four percent next year and three percent in 2024. The government’s inflation target range is two percent to four percent until 2024.
Since May 19, the BSP’s Monetary Board has raised the policy rate by 175 bps. Its initial lift off were two 25 bps rate hikes last May and on June 23, followed by an off-cycle 75 bps last July 14, and another 50 bps last month.
Based on the BSP’s August issue of the Monetary Policy Report (MPR), the central bank expects the peso will remain above the government’s exchange rate assumptions of P51 to P55 until 2023 but factors that weaken the local currency are expected to be tamed by late next year.
The BSP said exchange rate pressures will likely dissipate as the differential between domestic and global real policy rates start to close by end-2023.
The central bank does not target or announce its preferred level for the peso which has depreciated rapidly past P56 vis-à-vis the US dollar in July, but it expects the exchange rate outlook to be higher than what the inter-agency Development Budget Coordinating Committee (DBCC) assumed was P51 to P53 for 2022 and P51 to P55 for 2023 and 2024. The DBCC assumptions are also not targets but guides for the purpose of setting the national budget, GDP and external sector assumptions.
For now, the BSP monitors the depreciation pressures such as the aggressive monetary policy tightening by the US Federal Reserve and increased market risk aversion with the still ongoing Ukraine war with Russia. Another factor weakening the peso is the widening trade gap amid improving domestic demand and uptick in global oil prices.