INFLATION RISKS. Risks coming from the weakness of the peso against the US dollar, along with the continued acceleration of the inflation rate, are seen as primary factors for additional hikes in the Bangko Sentral ng Pilipinas' (BSP) key rates. The Bank of the Philippine Islands (BPI) forecast an additional 100 basis points increase in the BSP rate until end-2022. (PNA file photo)
MANILA – Additional increases in the Bangko Sentral ng Pilipinas’ (BSP) key rates are expected not only to help address the accelerating inflation rate but also the peso weakness, given the continued hikes in the Federal Reserve’s fund rate.
In a virtual briefing on Thursday, Bank of the Philippine Islands (BPI) lead market strategist Marco Javier said the bank forecasts the local currency to average at 56 to the US dollar this quarter and improve to 55.30 in the last quarter of the year.
The local unit almost hit 56.45 to the greenback in recent weeks, a record-low since Oct. 13, 2004, partly on the surging inflation rate and policy normalization in the US.
It has improved to the 55-level, which Javier traced partly to the off-cycle 75 basis points increase in the BSP’s key policy rates on July 14, which was made after the US reported another jump on its consumer price index to 9.1 for June 2022.
Javier said their outlook for the improvement of the local unit’s level in the last quarter of this year leans on the seasonal robust expansion of remittances from overseas Filipino workers (OFWs) during the Christmas holidays and expectations that oil prices would continue to average at USD100 per barrel until the rest of the year.
He said the improvement of domestic demand is a plus for the domestic economy but its continued recovery means higher importation, which is a disadvantage to the local currency.
He added that the interest rate differential with the US is also a negative for the peso, thus the forecast for continued hikes in the BSP’s policy rates given the same projection for the Federal Reserve’s key rates.
BPI forecast the BSP’s overnight reverse repurchase (RRP) rate to end 2022 at 4.25 percent.
To date, the RRP rate is at 3.25 percent.
The BSP’s key rates have been increased by a total of 125 basis points so far this year after the 200 basis points reduction in 2020 to a record-low 2 percent for the RRP.
BSP Governor Felipe Medalla on Thursday pledged the use of all measures to address risks to inflation due in part to the depreciation of the peso.
This was after the Federal Reserve again hiked its key rates by 75 basis points after the two-day meeting of the Federal Open Market Committee that ended July 27.
To date, the Fed fund rates are between 2.25 percent and 2.5 percent. (PNA)
