Further BSP rate hikes seen lifting peso
The Philippine peso could temper its weakness should the Bangko Sentral ng Pilipinas (BSP) decide to further raise interest rates, MUFG said, though it noted that the appreciation would still depend on external developments.
In a note, the bank said the peso, Thai baht and Korean won have led regional losses since the last meeting of the US Federal Reserve, which kept rates unchanged this month amid above-target inflation stateside.
“The Philippine peso, despite offering relatively higher yields, has not been sufficiently insulated from depreciation pressures given elevated US rates,” MUFG said.
“That said, the scope for further weakness could be moderated should the BSP extend policy tightening, although this remains contingent on external factors, particularly the absence of another energy price shock,” it added.
As it is, a weaker peso brings mixed effects.
Remittances from overseas Filipino workers stretch further in peso terms, supporting consumption, while exporters gain price competitiveness. But the slide risks stoking imported inflation and raising the peso cost of servicing foreign-currency debt.
BSP Governor Eli Remolona Jr. earlier said that while the depreciation could fuel inflation, it could also boost Philippine exports and help narrow the country’s trade deficit. He also reiterated that the central bank does not target a specific level and will allow market forces to determine the value of the currency.
Amid the war-driven volatility, the BSP’s Monetary Board this month raised its benchmark interest rate by a quarter percentage point to 4.75 percent, extending a tightening cycle that has now delivered a cumulative 50 basis points of increases.
Last week, the BSP said the country is projected to post a balance of payments (BOP) deficit of $10.7 billion in 2025, equivalent to 2.1 percent of gross domestic product (GDP).
That was wider than the central bank’s previous forecast of a $7.8 billion gap, or 1.5 percent of GDP. It would also mark a bigger shortfall than the $5.7 billion BOP deficit recorded in 2025
The BOP, which measures the country’s transactions with the rest of the world, falls into deficit when payments abroad exceed foreign currency inflows. Such an imbalance, in turn, could weigh on the local currency.
“The peso underperformed on its reliance on external funding, the high-for-longer US yield weighted on the currency despite oil-related support this week,” MUFG said in another note.
