Record lows
The local currency has hit record lows 12 times since the escalation of the Middle East conflict at the beginning of March. Before tensions intensified, the peso stood at P57.66. As of Friday, 21 August, the local currency closed at P61.67 per US dollar, down about 6.5 percent since the start of the conflict.
Neri said this could put pressure on the Bangko Sentral ng Pilipinas (BSP), which uses the country’s foreign reserves, in part, to dampen excessive volatility in the foreign exchange market. The central bank could also consider tighter monetary policy to mitigate currency-related inflationary pressures.
“Gross international reserves have declined significantly to $103 billion as of July, from $113 billion at the onset of the US-Iran war. While reserves remain adequate by traditional metrics, the sustained drawdown points to a gradual erosion of the Philippines’ external buffers,” he said.
“Without a rate hike, a faster depletion of GIR from spot-market intervention could add to peso weakness and further lift inflation expectations,” he added.
Another rate hike expected
Neri said BPI expects another 25-basis-point interest rate hike at the BSP Monetary Board’s upcoming meeting on Thursday, 27 August. This would be the third consecutive rate hike by the central bank amid inflationary pressures linked to the Middle East conflict.
Earlier BSP studies show that peso depreciation becomes inflationary when the weakening is sufficiently large or rapid to push higher import costs into consumer prices. A gradual decline can often be absorbed by businesses, but sharper depreciation, particularly of around 5 percent or more over a sustained period, can create greater inflationary pressure.
Neri said upside risks remain for the headline print, which the BSP projects exceeding its annual 3 percent target until 2028 as spillover effects from the energy shock materialize.
“Near-term risks are concentrated in food and energy. Adverse weather remains a key concern, with habagat-driven monsoon rains and flooding raising the risk of further crop damage just as food supply conditions were beginning to stabilize,” he said.
The BSP has said it takes around a full year for monetary policy decisions to fully take effect, while spillover effects from an oil shock take about 6 months to materialize.
Market up
Meanwhile, the Philippine Stock Exchange Index yesterday rose 0.21 percent to 6,251.38 as renewed US-Iran tensions kept investors cautious.
The PSEi spent much of the session in negative territory as concerns over the Strait of Hormuz resurfaced following Washington’s warning of tougher economic sanctions against Tehran and Iran’s warning that vessels violating its transit rules could face fines, detention or confiscation.
The index recovered late in the session as bargain hunters picked up beaten-down shares. Total value turnover was about P4.97 billion, with 108 decliners against 83 advancers.
Mining and Oil led sector gains, rising 3.19 percent, while Industrials was the weakest, falling 0.39 percent. Emperador Inc. [PSE: EMI] was the strongest index constituent, gaining 4.26 percent to P15.66, while Monde Nissin Corp. [PSE: MONDE] fell 3.66 percent to P6.85. The relatively thin turnover suggests Monday’s advance was largely a technical rebound rather than a broad shift in sentiment.
