The unexpected plunge of the peso last week can be attributed to the announcement of the Federal Reserve (a.k.a. The Fed) that it will leave its fund rate unchanged at 4.5 percent. Our own Bangko Sentral ng Pilipinas (BSP) has cut its policy rates by 125 basis points (bps) since last year, which exceeds the Fed’s 100 bps cut during the same period. The gap between the two rates has narrowed to 75 bps. A narrower gap influences the preference of foreign capital (US dollars) seeking to optimize returns and risk toward the US.

The impact was quickly felt in the currency market as the Philippine peso plunged 1.3 percent to a low of P58.32 to the US dollar from P57.58 based on Bankers Association of the Philippines (BAP) rates. This is the weakest level of the Philippine peso since February. This has raised market concerns that the BSP will walk back on its communicated interest rate path.

While this is possible, my own thinking is that the BSP has set its sights on supporting growth amidst domestic disinflation. Both the Fed and the BSP have different issues to contend with. The Fed is concerned that it does not yet fully understand the impact of US tariffs on inflation amidst resilient consumer demand. Remember this is the first time that tariff rates have been hiked in the past 60 years.

The BSP, along with its fellow agencies in charge of the economy, has to generate more economic growth. The timing cannot be any better given that inflation trends below the lower bound of the BSP’s inflation-targeting window. We need more economic growth to address a scenario that our very wide fiscal deficit will lead to a deterioration in our credit outlook or standing.

This is probably non-consensus, but the Philippine peso is strong enough to take care of itself in this environment. A surge in volatility can be expected given that the Fed-BSP policy path divergence is observable, but this, at least for now, looks temporary. If temporary, our US$104 billion in reserves should be sufficient to allow the BSP to manage this volatility.

What may be even more non-consensus is the possibility that the peso will be strategically allowed to weaken closer to P60-61 to the USD. Strategic means in the medium to long term and NOT tomorrow. The reason behind this scenario is the change in US trade policy.

Additionally, this week, US reciprocal tariffs were finalized—well, maybe. Following his start of August threat and our own negotiations, US President Donald Trump announced a new set of tariffs from those announced on Liberation Day in April.

The highest tariff is applied to Brazil at 50 percent, and we, along with most ASEAN countries, are set at 19 percent. Our East Asian trading partners, Japan and South Korea, have been slapped a 15-percent tariff rate, while China’s is still being negotiated along with Mexico. Canada faces a tariff rate of 35 percent. Those that are not listed or negotiated face a minimum 10-percent rate.

With the tariff hikes, Philippine exports (along with the rest of the world’s) to the US lose their price competitiveness. We can offset that with a weaker peso because weaker currencies make our goods relatively cheaper. We operate a very flexible/market-driven exchange rate, and if US demand for our exports were to be reduced, the corresponding effect on our balance of trade would weaken the peso and bring us back full circle to the pre-tariff hike levels. At least, that is what should happen fundamentally.

Markets are theoretically self-correcting if left alone. If there is a failure of the market to do so, the government’s role would be to intervene. While a weak peso can increase costs for consumers and firms that buy from the rest of the world, it can also enhance incomes from our exporters and overseas workers.

We should trust the BSP to support stronger growth and the peso to maintain or even enhance our strategic competitiveness.