Peso improves vs dollar on OFW inflows

The peso broke past the 53 to $1 level yesterday as remittances from overseas workers buoyed the local currency which closed at 53.96 to the dollar.

The Bangko Sentral ng Pilipinas (BSP) said the strong performance of the peso resulted from the surge in dollar inflows from overseas Filipino workers (OFWs) ahead of the enrollment season for the next school year.

OFW remittances are expected to continue lifting up the peso this month until school reopens in June, providing additional impetus to the already optimistic market.

The peso opened at 54.03 to the dollar but quickly appreciated and hit an intra-day high of 53.94 to the dollar. Total trades reached $376.5 million.

The peso appreciation also came in the heels of the successful bond offer of the National Power Corp. (Napocor) which was able to borrow from the market on its own for the first time in years.

Napocor raised a total of P5 billion, taking out an equivalent of $100 million from its $700-million borrowing requirement for the year. The successful fund-raising exercise would reduce the need for the National Government to borrow on its behalf.

The BSP said the peso is likely to remain strong especially with continued OFW inflows until the enrollment season is over.

This developed as the Monetary Board (MB) – the policy-making body of the BSP – decided to keep its policy rates unchanged, saying that further tightening is not needed despite the continued rise in US interest rates.

The MB decided to keep the rates at seven percent for overnight borrowing or reverse repurchase and 9.25 percent for overnight lending or repurchase rate.

The MB decision followed Tuesday’s decision of the US Federal Open Market Committee (FOMC) to raise its interest rates by another 25 basis points.

BSP Deputy Governor Amando Tetangco said yesterday that the FOMC action was widely expected since the US Fed has been announcing its plan for a calibrated increase in interest rates for the last few months.

"It only confirmed the Fed’s measured pace of interest rate action," Tetangco said.

According to Tetangco, the BSP had already raised its policy rates last month and the decision was made mainly to calm inflationary expectations.

"There is no need for a further increase at this time," Tetangco said. "We have enough flexibility to keep monetary policy settings unchanged for the time being."

"But we will continue to closely monitor developments and the inflation outlook," he said.

Tetangco ruled out any "significant monetary tightening", noting the slack in the economy and indications of possible moderation in output growth.

In its first quarter inflation report, the BSP said the rise in inflation could put its 2006 inflation target at risk but future monetary action would be geared towards guiding inflationary expectations rather than attempting to dampen demand-side impulses.

"We still see a deceleration towards 2006 although we would continue to review the numbers depending on what action will be taken on the demand to increase wages and transport fares," Tetangco said.

The BSP increased its policy rates last month, firing what it called a "warning shot" to head off mounting inflationary pressures in the next 14 months.

The language of its monetary decision fueled speculation of further calibrated increases in the BSP’s policy rates in order to restore the interest rate differential between US policy and benchmark rates.

But Tetangco said their recent review of inflationary pressures still did not show any indications of second-round inflationary effects that would trigger further tightening in their monetary policies.

Policy action, Tetangco said, would be considered only if there are strong evidence of demand-side effects arising from supply shocks, particularly in terms of adjustments in nominal wage rates in excess of losses in purchasing power.