Peso strengthens after China rate cut

THE PESO inched up against the dollar on Tuesday after China’s central bank cut its key loan rate.

The local unit closed at P56.035 per dollar on Tuesday, strengthening by 3.5 centavos from its P56.07 finish on Monday, Bankers Association of the Philippines data showed.

The peso opened Tuesday’s session weaker at P56.09 against the dollar. Its worst showing was at P56.135, while its intraday best was its closing level of P56.035 versus the greenback.

Dollars exchanged went down to $1.14 billion on Tuesday from $1.51 billion on Monday.

“The peso appreciated as the latest substantial policy rate cut from China signaled concerns on the Chinese economy,” a trader said in an e-mail.

China announced its biggestever reduction in the benchmark mortgage rate on Tuesday, as authorities sought to prop up the struggling property market and broader economy, Reuters reported.

The 25-basis-point (bp) cut to the five-year loan prime rate (LPR) was the largest since the reference rate was introduced in 2019 and far more than analysts had expected.

The five-year LPR was lowered by 25 basis points to 3.95% from 4.2% previously, while the one-year LPR was left unchanged at 3.45%.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They projected a cut of five to 15 bps.

The deeper-than-expected cut also suggests Beijing is no longer as concerned about the negative effects of lower lending rates on the currency or banks as they were last year.

A central bank-backed newspaper said on Tuesday that the benchmark mortgage rate cut would not create a negative impact on banks’ net interest margins. The peso strengthened on Tuesday amid the dollar’s recent weakness, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The local unit was also supported by the stock market’s rebound on Tuesday, he added.

The Philippine Stock Exchange index rose by 0.82% or 56.05 points to close at 6,854.66 on Tuesday, while the broader all shares index went up by 0.53% or 19.09 points to finish at 3,581.70.

For Wednesday, the trader sees the peso moving between P55.95 and P56.20 versus the dollar, while Mr. Ricafort expects it to trade from P55.93 to P56.13.