BSP unlikely to resume tightening to prop up peso

The Bangko Sentral ng Pilipinas (BSP) is unlikely to resort to new rate hikes to stem the peso’s weakness as monetary policy settings are sufficiently tight at the moment, Nomura Global Markets Research said.

In a commentary, the Japanese investment bank said the bar to hike in response to a volatile currency was “very high” for the Philippines and other Asian countries like India and Thailand.

This is in stark contrast to Indonesia which, Nomura said, would likely hike if the depreciation of the Indonesian rupiah is sharp.

”We also think that the bar for BSP to resume hiking is high because it sees its monetary stance as already ‘tight’ after delivering the most aggressive hiking cycle in the region,” Nomura said.

Weak currency

The weak peso that has fallen to 17-month lows in recent weeks is one of the factors preventing the BSP from starting its easing cycle, as geopolitical risks and diverging outlook on rate cuts in the United States power up the greenback.

This is because a volatile peso could push up import costs and stoke inflation, which quickened for the third straight month in April to 3.8 percent.

The BSP’s anti-inflation rate hikes can help support the peso by making domestic yields more attractive to investment inflows. But Governor Eli Remolona Jr. had said the recent depreciation of the local unit would unlikely trigger any policy actions from the BSP, which has so far kept its key rate unchanged at a 17-year high of 6.5 percent.

The Monetary Board, the highest policymaking body of the BSP, will meet again on May 16 to set rates, with analysts expecting the central bank to stay on hold.

‘Small amounts’

Instead, what the BSP is doing to soothe the peso’s volatility is dip into the country’s dollar reserves “in small amounts,” Remolona said, adding that current interventions are just enough “not to affect the value [of the peso] but to maintain orderly markets.”

The BSP chief also said earlier that the US Federal Reserve might cut rates “sooner” as the American job market begins to show signs of weakening due to tight financial conditions. This, in turn, could temper the dollar’s strength and ease the pressure on the peso.

But if the Fed defers any rate cut this year, Nomura said the BSP would likely stay on hold, too.

“BSP is not in a rush to start cutting rates due to upside risks to inflation, which is the primary policy consideration,” Nomura said.

“Barring new inflation shocks, BSP will nonetheless take the lead from the Fed in the cutting cycle to limit FX weakness and keep imported inflation in check,” it added.