Peso above P55 to persist, analysts expect more rate hikes – BSP
The Bangko Sentral ng Pilipinas, which does not target a peso-US dollar level, said it could remain above the P55 level until next year and possibly in 2024.
In its latest November Monetary Policy Report (MPR), released on the day the Monetary Board raised the policy rate anew by 75 basis points (bps) on Nov. 17, the BSP said the projected exchange rate is higher than they estimated in October.
“The exchange rate is expected to settle above the high end of the DBCC’s (Development Budget Coordination Council) assumptions of P51.00-53.00/US$1 for 2022 and P51.00-55.00/$1 for 2023 and 2024,” according to the MPR. The DBCC approved the exchange rate assumptions last July 8, when the peso was at P55. By Sept. 29, the exchange rate hit its lowest record at P59.
“The projected exchange rate path is higher than in the previous round, reflecting the continued depreciation of the peso as well as higher outlook for US interest rates, consistent with cumulative policy rate hikes by the Federal Reserve of 425 bps in 2022 and 50 bps in 2023,” said the BSP.
The BSP reiterated that the depreciated peso was only reacting to global developments and the US dollar’s strong position amid rising US interest rates.
Based on the MPR which also reports its survey of private sector economists, analysts anticipate the BSP to further tighten monetary policy settings by 75 bps to as much as 150 bps for the remainder of the year.
“Most of them (are) expecting a 75-bp rate hike in November and 50 bps in December. However, they noted that the magnitude will still largely depend on the US Fed’s policy action. For 2023, most analysts expect a follow-through policy rate hike by about 25-75 bps, while a reversal is anticipated in 2024 ranging from 25-150 bps,” said the BSP.
BSP Governor Felipe M. Medalla said last Thursday that the peso has appreciated recently at the P57-level but it was not just due to the BSP’s presence in the spot market, but also because the US dollar has weakened with a slightly slowing US inflation rate.
But Medalla said it helped that the market knows the BSP is more intensely intervening in the exchange rate and that it will raise the policy rate by as much as 75 bps to bring the key rate to five percent, thereby maintaining an interest rate differential that will not hurt the peso.
He said in normal times, there is no need for such explicit signalling as what he did before the Nov. 17 policy meeting. But these are unusual times, said Medalla, and he described normal times as when BSP is not too concerned about the US dollar and its effect on inflation.
Based on the MPR, the BSP forecasts inflation will remain above-the-target until the second quarter of 2023. Inflation is expected to decelerate back to within the target range by the third quarter next year and “approach the low end of the target range in Q4 (fourth quarter) 2023 to Q1 2024 due to negative base effects, and eventually stabilize at the midpoint of the target by Q2 2024”
The MPR noted that upside risks to the inflation outlook will continue in 2023, but will be broadly balanced in 2024.
The major upside risks are listed as: the potential impact of higher fertilizer prices; trade restrictions and adverse global weather conditions on international food prices; increased prices of fruits and vegetables owing to domestic weather disturbances; petitions for tricycle fare hikes due to elevated oil prices; higher sugar prices; and the possible reinstatement of the full tariff rates on several imports such as pork and rice that were temporarily lowered under Executive Order No. 171.
The main downside risk, meantime, is the impact of a weaker-than-expected global output recovery.
The MPR also noted that based on the November survey of private sector economists, inflation expectations will rise further and could “remain at risk of disanchoring.”
Private sector economists expect a higher mean inflation of 5.9 percent by the end of 2022, up from its previous forecast of 5.7 percent in October.
For 2023 and 2024, surveyed analysts also raised their estimates to 4.9 percent from 4.6 percent, and four percent from 3.8 percent, respectively.
The private sector economists’ forecasts are higher than the BSP’s inflation projections of 5.8 percent for 2022, 4.3 percent in 2023 and 3.1 percent in 2024.
For the 22 surveyed analysts, the risks to the inflation outlook tilted to the upside due to lingering inflationary pressures brought on by weather disturbances, global supply chain disruptions, Covid-19 pandemic, weaker peso against the US dollar, and second-round effects, said the BSP.