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Philippines: A weakening peso is creating a problem for BSP’s easy-money policy
MANILA, Philippines — The continued weakening of the peso could create a headache for the Bangko Sentral ng Pilipinas, which may be forced to tighten monetary policy earlier-than-expected at a time the economy still needs support to recover from a pandemic-led slump.
After outperforming most Asian currencies last year, the local unit is now trading at the P49-level against the US dollar from P47.9-level two weeks ago. Since the beginning of the year, the peso has slumped by 3.1%.
For analysts at Bank of the Philippine Islands (BPI), this depreciation is an added stress for the BSP, as it threatens to disrupt a manageable inflation environment that has allowed monetary authorities to keep rates at all-time low of 2.0% in a bid to stimulate consumption in the consumer-reliant Philippines.
“We continue to see the possibility of monetary adjustments in the coming months, especially given the recent movement in the FX market,” BPI economists said in an e-mailed commentary on Wednesday.
“We continue to see upside risks that could keep inflation above 4% in the coming months… The recent depreciation of the Peso will likely result in additional importation costs,” they added.
As it is, a premature rate hike would make credit costlier for pandemic-hit businesses and consumers, which could potentially derail the Philippine economy’s fragile revival.
Much of the peso’s strength last year can be traced to low imports as a result of weak domestic demand amid a pandemic-induced recession. In turn, dollars started piling up in the BSP’s reserves, propping up the local currency and giving the economy enough buffers amid hard times.
But the situation is different now. Easing restrictions and improving local demand are giving importers a new impetus to ship in more goods, thereby pushing up domestic appetite for dollars and pressuring the peso. For this year, the central bank forecast goods imports to grow 12% annually that, if realized, would reverse the massive 22.9% contraction posted in 2020.
Worsening the currency woes are fears that the US Federal Reserve may hike interest rates earlier than thought, which could trigger capital outflows in emerging markets like the Philippines. This combo of surging imports and hawkish signals from US central bank convinced BPI that the peso may revisit the P50-level, “even if just briefly,” later this year.
With the Philippines being a net oil importer, a steep peso slide can push up local pump prices and feed into the headline inflation rate, which eased to 4.1% in June. That said, BPI sees inflation averaging 4.5-4.3% this year, above the BSP’s 2-4% annual target.
But beyond inflation, a weak currency could also bloat the value of the government’s foreign debts all while the BSP’s dollar reserves decline, something that BPI said may alarm credit rating agencies.
“The BSP might be forced to hike earlier than expected in order to temper the decline in the (dollar reserves) and protect the country’s credit rating,” BPI said.
“Local yields might go down in the short term given the recent decline in inflation. However, upside risks to inflation remain, which could eventually lead to higher rates in the coming months,” it added.
Source: https://www.philstar.com/business/2021/07/07/2110855/weakening-peso-creating-problem-bsps-easy-money-policy