Peso skids past P53:$1 level to hit a fresh 3-year low
MANILA, Philippines — The peso continued its retreat on Monday to sink past the P53-per-dollar level, as expectations of more aggressive rate hikes in the US prop up the greenback and spur capital outflows in emerging markets.
The local unit shed 30 centavos from its previous finish to close at P53.3 against the US dollar. This is the peso’s weakest finish in more than three years, or since it closed at P53.535 on October 31, 2018.
At this rate, the local currency is now trading outside the Duterte administration’s P51-53 assumption for this year. The peso has been hovering within three-year lows recently, and a forecast-beating US inflation in May that stoked fears of a more combative US Federal Reserve only put more strain on the local currency.
A deeper currency slump, in turn, would be a big headache for the Bangko Sentral ng Pilipinas, which just started hiking rates in May to attack an uncomfortably high inflation. This is because a depreciating peso could bloat the value of the country’s imports, including oil which has gone ultra-costly amid the ongoing Ukraine-Russia war.
Rate hikes usually help temper the currency’s weakness, although the BSP may also dip into the country’s dollar reserves to ease any foreign exchange fluctuations. But Domini Velasquez, chief economist at China Banking Corp, does not expect the BSP to go hard on its tightening.
"The BSP's monetary tightening cycle will be driven mostly by their outlook on inflation dynamics, i.e. second round effects becoming more entrenched, if there are demand-side pressures on inflation, and how higher prices will affect growth prospects going forward," Velasquez said in a Viber message.
"This year there are downward pressures on the peso such as growing import bill and the aggressive tightening of the Fed. We expect further depreciation of the peso, possibly until P54 for the year," she added.
For Jun Neri, lead economist of Bank of the Philippine Islands, the BSP could become more hawkish if the currency situation worsens.
"If we get closer to P54 by next week and oil trades close to $125/bb in New York, they could hike by 50 basis points on June 23," Neri said in a Viber message.
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