50-point rate hike seen as peso weakens further

A major bank analyst sees that there’s a looming major rate hike, which can reach 50 basis points, to be imposed by the Bangko Sentral ng Pilipinas (bsp) as the peso continues to plunge against the United States dollar, breaching the P63 level.

Bank of the Philippine Islands lead economist Emilio Neri Jr. said the BSP is seen to adopt a more aggressive monetary policy response in its meeting this Thursday, 22 October, including a “jumbo” 50-basis-point rate hike if the currency continues to weaken.

Neri said that the peso’s recent slide — breaching the P63-per-dollar level for the first time last week and closing at a record-low P63.06 on Thursday — strengthens the case for additional BSP rate hikes at its remaining two policy meetings this year.

“The magnitude of the rate hike next week will likely depend on the behavior of the peso in the coming days,” he said.

“If the Peso depreciates further and moves closer to 64, the BSP may consider a 50 basis point hike on Thursday,” he added.

Although the peso recovered from its record-low close to P62.985 last Friday, it hit a fresh intraday low of P63.23 against the US dollar, surpassing Thursday’s trading low of P63.15.

Despite the stronger closing rate, the full-day weighted average rose from P63.049 on Thursday to P63.068 on Friday, suggesting that transactions over the session reflected a slightly weaker peso overall.

The currency has remained sensitive to developments stemming from the ongoing war in the Middle East, including elevated global oil prices and safe-haven demand for the US dollar.

El Niño to worsen inflation

The BSP and Neri have cautioned that an expected severe El Niño event in the coming weeks poses a major upside risk to inflation, which reached a three-year high of 7.2 percent in September amid broader uncertainty surrounding the Gulf conflict.

Neri said a larger rate hike could also serve as a preemptive measure against second-round inflationary effects and a rapid de-anchoring of inflation expectations, particularly ahead of a potential supply shock from El Niño.

The BSP’s August rate hike was similarly described by Governor Eli Remolona Jr. as “preemptive” in light of El Niño risks and the implementation of the first tranche of wage increases in Metro Manila.

Neri said the outlook points to further central bank rate hikes, with the BSP’s target reverse repurchase rate potentially reaching 6 percent by year-end if tensions between the United States and Iran continue to escalate.

“Regardless of whether the BSP delivers a 25 or 50 bp hike next week, the balance of risks increasingly points to further tightening in the next 6 months,” he said. “Under a more adverse scenario, the policy rate could potentially end the year at 6% if the Middle East conflict escalates.”