Weaker peso no immediate effect on monetary policy — BSP

‘For now, the impact on monetary policy is not large. But it may be a factor depending on what happens between now and the next monetary policy meeting; unless the peso movement is very sharp, we allow foreign exchange adjustments to happe’ — BSP Governor Remolona

The Bangko Sentral ng Pilipinas (BSP) on Wednesday said the weaker peso against the US dollar will have no immediate effect on its monetary policy projection.

On Tuesday, the peso further depreciated to P57 per US dollar, posting a 17-month low, data from the Bankers Association of the Philippines (BAP) show.

On Wednesday, the exchange rate came to a high of P57.33 per dollar and a low of P57.1 per dollar based on BAP’s data.

“For now, I think the impact on monetary policy is not large. But it may be a factor depending on what happens between now and the next monetary policy meeting,” BSP Governor Eli Remolona said.

“Unless the peso movement is very sharp, we allow foreign exchange adjustments to happen,” he added.

Remolona explained the US dollar appreciated as demand for this currency rose against the others globally, reflecting investors’ move to take advantage of likely high interest rates for a longer period.

This came after Federal Reserve chairman Jerome Powell on Tuesday said the US central bank deems it appropriate to allow a “restrictive policy further time to work.”

Markets overreacted

“I think the markets overreacted. The markets were over optimistic about the easing of the Federal Reserve’s rate. Now, I think they get the message that the easing won’t happen until late in the third quarter,” Remolona said.

While a high interest rate from the central bank attracts investments in debt instruments denominated in its country’s currency, such rate also signals higher prices of goods and services.

To manage prices, central banks impose high benchmarks for banks’ interest rates.

Remolona said Iran’s drone and missile attacks on Israel last week has strengthened investors’ belief that the Federal Reserve will keep its policy rate elevated as the armed conflict might raise global oil prices.

However, he said the conflict might not worsen drastically.

“I think Israel intends to retaliate but the retaliation will not be massive. I hope it stays that way,” Remolona said.

Bloomberg data yesterday showed the price of United States’ WTI Crude fell by 0.53 percent, while the price of Europe’s Brent Crude decreased by 0.40 percent.

Longer delay on rate cuts

Remolona said the BSP’s Monetary Board might lower its existing 6.5 percent policy rate at a later period this year amid high transport and rice prices.

“Our inflation rate also has been stubborn, but not as stubborn as in the US. I think the central scenario for easing rates would be in the fourth quarter. If things are worse, then we can postpone it until the first quarter of 2025,” he said.

In its monetary policy meeting last 8 April, Remolona projected the BSP’s Monetary Board to cut its rate the soonest in the third quarter.

The BSP expects overall inflation to temporarily increase in the next few months beyond its 2 to 4 percent target range, partly due to the statistical principle of positive base effect.

Overall inflation last month rose again to 3.7 percent from 3.4 percent in February and 2.8 percent in January, according to the Philippine Statistics Authority.

“I think the BSP will adjust its policy when inflation approaches 5 percent, and we must worry once the currency rate reaches at least P58 per dollar,” Jonathan Ravelas, former BDO market strategist, told the DAILY TRIBUNE over the phone.

Ravelas said the weaker peso on Tuesday highlighted the accumulated effects of multiple economic and industry data recently.

He said these were the rise in bond rates in the secondary market, the fall of local stock market index below the 6,500 level, the announcement by the National Grid Corporation of the Philippines on rotational brownouts for Luzon and Visayas regions, and the lower rice supply due to drought.