The peso vis-à-vis the US dollar may have found the level it could be stable in and maybe hold for some time, according to a senior Bangko Sentral ng Pilipinas (BSP) official.
BSP’s Monetary Board member V. Bruce J. Tolentino said the exchange rate, which is currently at the P56-level “has now stabilized”. It was still on the high side of the P56 range and even hit a low of P56.90 on Monday, Nov. 28.
“It has now stabilized to this level, and we expect it to moderate over the next few months,” said Tolentino in a recent event hosted by the Rural Bankers Association of the Philippines (RBAP).
“The aggressive BSP action has stabilized the exchange rate,” he also said.
The peso appreciated back to the P56 level on Nov. 23, the first time it was back at this rate since early July this year. The peso hit its lowest record rate of P59 last Sept. 29.
The tamer US inflation and possible lower rate hikes by the US Federal Reserve is contributing to the softening of the US dollar.
The BSP as of Nov. 17 has a policy rate of five percent. The Monetary Board, central bank’s policy-making body, has raised the key borrowing rate by 300 basis points (bps) since May this year to ensure inflation expectations are well-anchored.
The aggressive rate hikes will likewise make sure that inflation, currently at 5.4 percent average as of end-October, will fall back to within the two percent to four percent target range by 2023.
The BSP rate increases in the last three policy meetings were also in response to the US Federal Reserve’s similar aggressive tightening actions. BSP Governor Felipe M. Medalla’s latest signal to the market is that the BSP will continue to mirror US rate hikes for as long as inflation is on the high side. For this year, the BSP forecasts inflation will average at 5.8 percent. It has climbed to a 14-year high of 7.7 percent in October. The BSP expects it to peak in November or December this year.
Matching the US rate hikes will also add to the stability of the exchange rate.
“Inflation continues to be worrisome (and) we don’t know how far it will go. We expect that it will start to go down with the Christmas season. But this is still way beyond the BSP’s policy band of 3 ±1. So, we have had to raise interest rates quite aggressively,” said Tolentino.
“We continue to closely monitor what’s going on with the US Federal Reserve because like it or not, we are heavily affected with what happens in the US. And particularly because, most of global trade is denominated in dollars. So, we need to accommodate whatever’s going on in the US,” he added.
Tolentino, a rural and agriculture development expert in the Monetary Board with his experience as deputy director-general of the International Rice Research Institute, said supply-side constraints is very much a concern and the principal driver of inflation.
“This comes from the cost of food and unproductive agriculture and the high prices of food to all Filipino consumers," he said. "The root cause of this is that our agriculture sector is relatively low productivity, and our policies are, in general, still heavily protectionist that prevent free trade from allowing our food costs to adjust what happens in the world context,” he told members of RBAP.
While the BSP expects inflation to average at 5.8 percent for 2022, it sees a lower 4.3 percent average for 2023 and 3.1 percent for 2024.