The local unit of Dutch financial giant ING Bank said the weakness of the peso contributed to higher inflation rate in March and will likely compel the Bangko Sentral ng Pilipinas to be “hawkish” and tweak the benchmark interest rates.
ING Bank Manila senior economist Joey Cuyegkeng said in a report the weak peso caused the uptick in inflation in March to 4.3 percent from the revised 3.8 percent in February.
“The government’s plan to import rice and tapering impact of tax-related price pressures would moderate inflation over the policy horizon. Saudi Arabia plans to cut its oil price for Asia next month as US oil makes inroads to Asia…,” Cuyegkeng said.
“But the sustained weakness of the peso is likely to increase its impact on overall inflation. The peso is 4.4 percent weaker in April which would likely lead to a 0.25 percentage point impact on inflation. We cannot brush aside the possibility of a significantly weaker peso,” he said.
Cuyegkeng said the peso weakened by 7 percent to 9 percent in 2013, 2015 and 2016 because of the shifting US monetary policy and heightened local and global risks.
“A weak peso may eventually spur the central bank to turn hawkish,” Cuyegkeng said.
Australia and New Zealand Banking Group Ltd. said earlier the peso could decline further against the US dollar and might close the year at 53.50 per greenback amid the widening current account deficit.
Latest data showed that the country’s external position continued to weaken in 2017, with the current account deficit hitting $2.5 billion, surpassing the Bangko Sentral’s previous projection of a $100-million deficit for the year.
The deficit was also more than double compared to the $1.2-billion deficit a year ago. The 2017 deficit was the biggest since 1999, when the current account shortfall hit $2.85 billion.
The full-year deficit last year accounted for around 0.8 percent of GDP. This was in sharp contrast to 2013, when the country ran a current account surplus of 4.2 percent of GDP.
“Strong domestic growth has resulted in a surge in imports with the latest trade data showing no near-term improvement,” ANZ said.
ANZ said unlike India and Indonesia which ran current account deficits but had strong foreign portfolio inflows to fund them, the Philippines was not able to attract enough portfolio inflows, although a rise in net foreign direct investments helped take some pressures off.
“Policymaker remain comfortable with a weaker currency, and have shown reluctance to increase interest rates in order to slow down domestic demand,” the bank said.
The policy-making Monetary Board, in its meeting on March 22, decided to maintain the benchmark interest rates steady on the back of a robust economy and expected manageable inflation environment.
“Hence, we expect the Philippine peso to weaken further on the back of sustained deterioration in the current account. We forecast USD/PHP to end 2018 at 53.50,” ANZ said.