The Philippine peso’s recent depreciation has largely followed foreign exchange market dynamics, according to ASEAN+3 Macroeconomic Research Office (AMRO) Chief Economist Dong He.

At a Thursday press conference at the Bangko Sentral ng Pilipinas (BSP) headquarters, He said the local currency’s decline was to be expected given the country’s exposure to the global energy shock.

“[L]argely, we think the exchange rate has been moving in line with fundamentals,” he said.

“Because, as you know, the Philippine economy was hit by a major global energy shock. It has suffered a negative terms-of-trade impact. In this kind of environment, one would expect the exchange rate to depreciate somewhat, right?”

The peso sank to two consecutive record lows last week, breaching the P62-per-US dollar threshold for the first time on Friday to settle at P62.265 against the greenback.

The currency opened at P62.05 and weakened to as low as P62.27, surpassing the previous record of P61.995 set the week prior on 18 August. The move came despite easing global oil prices, as renewed uncertainty over the US-Iran conflict and continued disruptions around the Strait of Hormuz kept safe-haven dollar demand elevated.

He said AMRO found that the currency’s depreciation, while having some negative impact on domestic prices, has yet to significantly compound headline inflation, which has accelerated nearly sevenfold year on year.

“So in our analysis, actually, there were some negative pass-through effects from exchange rates to domestic prices. I think the BSP has a very successful inflation-targeting framework in place,” he said.

“In this kind of framework, exchange rates typically absorb shocks, so what you need to guard against is the exchange rate becoming a shock amplifier. But so far, we haven't seen a lot of that.”

The elevated inflation print has prompted the central bank to raise interest rates three times since March, as the broader effects of the Middle East conflict compound local weather-related disruptions.

Analysts have attributed the peso’s decline to the conflict, the country’s heavy reliance on oil imports passing through the Strait of Hormuz and safe-haven demand for dollars.

For its part, the BSP has clarified that it allows the peso to find its own level in line with normal foreign exchange market movements, intervening only during periods of heightened volatility.

At a Senate panel last Thursday, BSP Governor Eli Remolona Jr. acknowledged that the peso is unlikely to return to P60 per US dollar, as doing so would come at the expense of the country’s foreign reserves.

“[The depreciation] can be slowed down, but it can’t be fixed. It can’t go back to P60. That’s not possible,” he said in Filipino.

“If the peso weakens very sharply, the impact of exchange rates on inflation is greater,” Remolona added. “But if the movement is gradual, inflation is not affected as much. So what we do is manage sharp movements in the exchange rate.”