Peso weakens to P55:$1 on inflation concerns

The peso lost to the US dollar on Tuesday, Feb. 7, depreciating back to the P55 level due to the higher-than-anticipated January inflation of 8.7 percent, surpassing consensus forecast of 7.6 percent.

The local currency closed weaker at P55.085 versus Monday’s rate of P54.39. The peso depreciated to P55.1 on Tuesday while its strongest was at P54.6.

Based on Bankers Association of the Philippines data, the weighted average for the peso was P54.848 from P54.279 the previous day. The spot market volume rose to $1.274 billion from $1.053 billion.

Last week, the Bangko Sentral ng Pilipinas (BSP) led the market in projecting a lower inflation number for January. Since the assessment pointed to inflation already peaked in December 2022 at 8.1 percent, the peso strengthened to the P53 level on Feb. 2.

Bank of the Philippine Islands (BPI) in a commentary said the peso could depreciate further due to improving demand and imports. “The behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. If a recession in the US happens, the US central bank may cut interest rates eventually. This will diminish the strength of the US dollar and provide support to other currencies like the peso. But in this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the substantial current account deficit of the Philippines,” said BPI.

As for inflation, the Ayala-controlled bank said February inflation could still be above 8.5 percent due to the high January inflation data, before decelerating in March.

“A lower inflation print is more likely in March or April if oil prices remain stable. Inflationary pressures from food may also start to subside in these months as the harvest season begins and as imports arrive. Additional relief is expected due to the recent appreciation of the peso,” said BPI. “Nevertheless, the decline in inflation will be gradual amid the uncertainties affecting supply. So far, we expect a 4.8% full year inflation in our baseline scenario, but this could go up to 6.6% in a worst case scenario if supply problems are not addressed,” it added.

The market was expecting the peso-US dollar trading to stabilize around the P53-level ahead of the Feb. 16 Monetary Board policy meeting. The projection is that BSP will raise the key rate by 25 basis points (bps) but with the higher January inflation, the market thinks the BSP will consider 50 bps instead for next week’s rate hike.

The central bank raised the policy rates by a cumulative 350 bps in 2022 to ensure inflation will return to within the government target band of two percent to four percent this year.

BSP Governor Felipe M. Medalla said inflation is expected to revert to the target range by the second half of this year at the earliest and could be below two percent in 2024. But this was before the 8.7 percent announcement for the January inflation.

Medalla has said that the pressure to match US rate hikes are lower compared to 2022, especially since the US dollar has weaken and the peso has recovered from its lowest exchange rate of P59 in October last year.