Market sees future BSP actions to ease pressure on peso

A senior economist from the Dutch banking group ING sees more actions from the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) to tame the weakening peso and ease inflationary pressures.

ING Bank Manila Senior Economist Joey Cuyegkeng said that the BSP would likely implement two policy interest rate increases next year.

“We think another rate hike is possible later this year and two more in 2019 to moderate the peso’s depreciation back to around two percent in 2019,” Cuyegkeng said.

On Wednesday, key interest rates were further hiked by 25 basis points as the policy-making MB sees inflation expectations remained elevated for this year.

BSP Nestor Espenilla Jr. said with this policy action by the MB, price pressures are expected to slow down this year, while pulling the inflation rate back to the two to four percent target for next year.

As inflation is expected to stabilize next year, Cuyegkeng noted that the possible interest rate hikes in 2019 will be targeting the local currency, which is now hitting the P53-to-a-dollar level.

“The peso is likely to remain under pressure for various reasons – deteriorating external payment balances, strong fiscal stimulus on top of favourable household and business spending and emerging market-negative external developments including a faster pace of US monetary tightening and trade fears,” the ING Bank’s economist noted.

He mentioned that the Philippine peso has been the worst performing currency in Asia, with year-to-date loss of seven percent. The peso is also trading at a 12-year low.

“Although the pass-through impact of inflation has moderated over the past decade, a significant depreciation still contributes to inflation pressures and fuels concern of inflation remaining at elevated levels,” said Cuyegkeng.

“However, the central bank’s hawkish tendency would be needed as emerging market sentiment remains weak and US monetary tightening continues with added pressure on moderating global liquidity in the next few years,” he added, noting that further policy tightening will help contain such concerns.