‘BSP’s dovish bias negative for peso’

MANILA, Philippines —   While the peso has strengthened against the dollar recently, the local currency is still sensitive to depreciation pressures from expectations over US Fed policy amid the “dovish bias” of the Bangko Sentral ng Pilipinas (BSP). In a report, Bank of America (BofA) Global Research said current account inflows in the Philippines have improved from last year. Still, the peso has had limited reactions to the data surprises despite better trends.

“The peso has weakened against most Asian peers this year, partly due to BSP’s dovish bias. With the next policy meeting some time away, dollar direction could be the key factor driving the peso in the near term,” it said.

BofA said the rate cut last week pointed to a clear shift in BSP’s priorities toward supporting the domestic economy. However, lower interest rates in the Philippines raise the likelihood of a narrower interest-rate buffer against dollar rates.

“That may gain importance as a factor for corporate hedging behavior once the dollar stabilizes. If dollar strength picks up or US yields move higher again, this pressure could increase peso sensitivity to the US policy outlook,” the bank said.

Food price shocks and higher commodity prices also remain critical risks for the Philippines as these could lead to a broader current account and trade deficits. Geopolitical risks could impact tourism and export flows as well.

According to the bank, the peso can still appreciate versus the dollar over time as the US Federal Reserve will likely commence its easing cycle soon.

BofA Global Research revised its foreign exchange forecast to 56:$1 by end-2024 from 57:$1 previously. It also sees the peso appreciating further to 55.5:$1 in the second quarter of 2025.

The peso appreciated further to its strongest level in over four months on Thursday. It strengthened by 16.7 centavos to close at 56.333 to $1 from Wednesday’s 56.5 to $1.

Last week, the Monetary Board slashed borrowing costs by 25 basis points, marking the central bank’s first rate cut in almost four years. This brought the key rate down to 6.25 percent from 6.5 percent.

Before this, the BSP kept its policy rate steady for six straight meetings since November 2023. From May 2022 to October 2023, it hiked rates by 450 basis points to tame inflation and stabilize the peso.

The BSP will meet on Oct. 17 and Dec. 19 to discuss policy.