The peso lost ground intraday to P58.50 versus the US dollar and closed to a new low of P58.49 on Thursday, Sept. 22, from its previous exchange rate of P58.
The peso opened at P58.1, hit a new intraday low of P58.50 and did not recover despite the Bangko Sentral ng Pilipinas’ (BSP) expected interest rate hike of 50 basis points (bps) from 3.75 percent to 4.25 percent on the same day.
Based on Bankers Association of the Philippines data, the peso’s weighted average rate stood at P58.406 on Thursday from P57.89. The spot market volume increased to $1.51 billion, up from the previous $1.05 billion.
BSP Deputy Governor Francisco G. Dakila Jr. said on Thursday that while the BSP does not target the exchange rate, it will intervene in the spot market to ease pressures off the peso. The rate hike of 50 bps is expected to smoothen exchange rate volatilities.
Dakila said the current movement of the peso vis-à-vis the US dollar is expected as it largely reflects the strength of the greenback with a rising US interest rates. It also emanates from concerns over the still ongoing Russia-Ukraine war and its impact on the global supply chain, the global uncertainty and elevated inflation across countries. All these factors drive investors to pick up the US dollar as a “safe haven asset”.
“Our view is that the recent foreign exchange pressures are not unique to the peso, and at the same time the peso’s movement are a natural consequence of the prevailing current account dynamics of a growing economy, reflecting the increase in the country’s imports amid ongoing economic recovery,” said Dakila in a press briefing after the BSP key rate announcement.
“The BSP will respond to exchange rate fluctuations to the extent that they pose a risk to the inflation outlook,” he also assured the market.
Meantime, Dakila said the economy is strong enough to withstand several external headwinds and it has buffers to protect the peso.
“We have ample gross international reserves and the currency is supported by structural foreign exchange inflows including exports, remittances, business process outsourcing receipts, tourism and foreign investments,” he added.
In a commentary, Bank of the Philippine Islands (BPI) analysts said it was crucial and expected of the BSP to implement “foreceful rate hikes” because otherwise, it will have to release foreign reserves to stop further peso depreciation. The BSP’s reserves have already fallen below $100 billion.
“Without the forceful rate hikes from the BSP, the central bank may need to offload more foreign reserves in order to manage the depreciation of the peso. This could put the country’s credit rating at risk since a substantial decline in reserves will lead to a deterioration in the country’s external position,” said BPI.
The BSP has two more policy rate meetings for 2022. BPI expects the Monetary Board to end the year with a higher benchmark rate of 5.25 percent from its current 4.25 percent or an increase of another 100 bps.
“Considering the uncertainties both here and abroad, we expect the BSP to hike again in the last two meetings of the year, up to 5.25% depending on what the Fed will do and the behavior of the exchange rate,” said BPI.
BPI also expects the peso to continue to depreciate in the medium term with rising imports, which will keep the US dollar demand high and the possibility of tighter dollar supply will further put pressure on the local currency.