The peso on Friday depreciated further to a new record low of 58.5 against the US dollar a day after the US Federal Reserve hiked the policy rate by 75 basis points to rein in inflation in the world’s biggest economy.
The peso lost a centavo from Thursday’s close of 58.49 against the greenback. Trading volume reached $985 million, down from $1.514 billion a day earlier.
The Fed’s fifth-straight rate hike brought it to a range of 3 percent to 3.25 percent, the highest since 2008. The Fed resorted to big rate increases to control inflation that reached 8.3 percent year on year, above its benchmark target of 2 percent.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said earlier that the higher Fed Fund rates led to stronger US dollar against major global/Asian/ASEAN currencies on wider interest rate differentials in favor of the US currency.
The Bangko Sentral ng Pilipinasremained unfazed by the peso’s depreciation, saying its current movement was expected as the US dollar gained strength “given the US Fed tightening.”
“Other currencies in the region are also weakening,” said BSP Deputy Governor Francisco Dakila
“With the policy adjustment now, as well as the expected seasonal inflows from remittances especially during the Christmas season, there should be a lot of earnings available for repatriation from overseas Filipino workers [that should support the peso],” Dakila said.
The BSP on Thursday hiked the overnight borrowing rate by another 50 basis points to 4.25 percent to support the peso against the greenback.
Bank of the Philippine Islands said in a report that assuming the Fed officials would stick to their latest dot plot, the Fed Funds rate might increase further to 4.4 percent in 2022 and 4.6 percent in 2023.
“If the BSP continues to hike by 50 bps only in the last two meetings of the year, the differential with the US rate will go back to where it was in July when the BSP did an off-cycle hike. In this scenario, the peso may continue to depreciate and may even breach the 59 level. This may lead to another inter-meeting hike given the need to temper the depreciation of the peso,” BPI said.
BPI expects a continued peso depreciation in the medium term as imports will likely increase further due to the recovery of the economy.
“Dollar demand may pick up and keep the exchange rate above the 56 level. Meanwhile, the possibility of tighter dollar supply may contribute further to peso depreciation. The Federal Reserve is expected to continue hiking aggressively this year,” the bank said.
Ricafort said the peso weakened by a total of P7.51 or 14.7 percent against the dollar since closing at 50.999 in end-2021.