The Bangko Sentral ng Pilipinas said Thursday it is prepared to raise the benchmark interest rate by 50 basis points next month, as the peso pierced the 56-a-dollar barrier and the gross international reserves declined to a 21-month low.
“BSP is strongly committed to maintaining price stability. In this regard, the BSP is closely monitoring developments in the financial markets, particularly the recent hawkish stance of the Fed, which has put strong depreciation pressures on global currencies, including the Philippine peso. If such pressures are left unchecked, these could add to the already high domestic inflationary pressures,” said BSP Governor Felipe Medalla in a statement.
“And because of this, the BSP is prepared to be more aggressive in raising its policy rate, compared to its initial gradualist stance. In particular, BSP is prepared to raise its policy rate by 50 bps [basis points] by August,” Medalla said.
“The BSP is ready to take further policy actions, if needed. It will also continue to support and advocate for non-monetary actions by other government agencies to contain any further inflationary pressures that may spill over to 2023,” he said.
Data from the Bankers Association of the Philippines showed the peso shed P0.39 to close at 56.06 against the greenback on Thursday, down from 55.67 on Wednesday.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said in an emailed message that it was the local currency’s weakest level in nearly 17 years or since it settled at 56.295 a dollar on Sept. 27, 2005. Total volume turnover reached $1.114 billion, down from $1.245 billion on Wednesday.
“This is largely due to the stronger US dollar vs. major global currencies, amid increased global risk aversion/risk off mode recently as the markets price in the possibility of US economic slowdown or even recession in view of more aggressive Fed rate hikes/monetary tightening in an effort to bring down inflation towards the long-term target of 2 percent [from the current new 40-year high of 8.6 percent],” Ricafort said.
Ricafort noted the decrease in the gross international reserves to $101.98 billion at end-June from $103.65 billion in May, as the government settled its foreign debt coupled with lower value of gold holdings of the Bangko Sentral ng Pilipinas.
This was the lowest GIR level since it amounted to $100.443 billion in September 2020. “The decline in the GIR somewhat correlated with the weaker peso in recent months,” Ricafort.
The Bangko Sentral said the June GIR still represented a more than adequate external liquidity buffer equivalent to 8.5 months’ worth of imports of goods and payments of services and primary income.
It is also about 7.3 times the country’s short-term external debt based on original maturity and 4.6 times based on residual maturity.
“The month-on-month decrease in the GIR level reflected mainly the national government’s payments of its foreign currency debt obligations and downward adjustment in the value of the BSP’s gold holdings due to the decrease in the price of gold in the international market,” the BSP said.
Ricafort said the offsetting positive factors for the peso included the recent decline in global crude oil prices to new lows in nearly two months to below $100 per barrel and the drop in other global commodity prices that could help reduce the country’s import bill and ease inflationary pressures.
He said the US Treasury yields also eased to among one-month lows that could reduce the attractiveness/allure of the US currency with lower US Treasury/government bond yields.
“Another offsetting positive factor for the peso—recent signals on the possible bigger local policy rate hike of around 0.25-0.50 on the next rate-setting meeting on Aug. 18, 2022 and also signals of further 100 basis points hike in the local policy rates for the rest of the year,” Ricafort said.