The Philippine peso remains Asia’s “weakest link” as markets remain largely unconvinced that the Bangko Sentral ng Pilipinas’ (BSP) hawkish policy stance can sufficiently contain inflation without further weakening economic growth, according to Mitsubishi UFJ Financial Group (MUFG) Bank Ltd.

The Tokyo-based financial giant noted that the peso has continued to lose ground despite the BSP’s recent rate hikes, with the currency falling to successive record lows against the United States (US) dollar last week.

“[BSP] Governor [Eli M.] Remolona [Jr.] has signaled willingness to tighten policy further as inflation risks remain elevated, but markets continue to focus on the difficult balance between containing inflation and preserving growth,” MUFG Global Markets Research senior currency analyst Lloyd Chan said in a commentary on Monday, Aug. 31.

Last week, the peso sank to a record low against the US dollar, making it Asia’s worst-performing currency over the past week as soaring energy import costs and a widening trade deficit offset recent central bank rate hikes.

MUFG earlier noted that the peso’s underperformance stemmed from persistent pressure on the nation’s external account. The peso closed at ₱62.265 per dollar on Friday, Aug. 28, sinking past its previous historic low of ₱61.888 set just a day earlier.

According to the Japanese lender, the peso fell one percent in the previous week, extending its broader decline, with the currency down 1.6 percent since the start of August, 1.4 percent this quarter, and 5.8 percent so far this year.

For its part, the BSP raised its benchmark policy rate by 25 basis points (bps) to five percent, marking its third consecutive hike aimed at reining in sticky inflation.

Headline inflation slowed to a three-month low of 6.2 percent in July from 6.4 percent in June, down from its peak of 7.2 percent in April. Core inflation—which excludes volatile food and energy items—eased to 4.2 percent from 4.4 percent.

Even with higher interest rates, the peso’s decline accelerated after government data showed July imports jumped 59.7 percent, blowing out the trade deficit to roughly $6 billion.

Widening imbalances and elevated commodity prices are expected to keep the BSP cautious, with MUFG saying persistent inflation, a wider external deficit, and peso weakness could prompt further rate hikes, but at a slower pace.

Meanwhile, economic growth has been experiencing a prolonged slump amid governance issues tied to “ghost” flood control projects. Philippine gross domestic product (GDP) growth averaged 2.6 percent in the first half, dragged by the post-pandemic low of 2.3 percent in the second quarter.

Looking ahead, MUFG forecasts the peso to recover to ₱61.75 per dollar this quarter, strengthen to ₱61.50 in the fourth quarter, reach ₱61 in the first quarter of 2027, and move into the mid-₱60 range by the second quarter of 2027.