Peso sinks to new record low as markets price in BSP cut
The Philippine peso tumbled to a fresh record low on Tuesday, pressured by growing expectations that the Bangko Sentral ng Pilipinas (BSP) would cut interest rates later this week.
The slide also came as the dollar strengthened on renewed speculation that a divided Federal Reserve (Fed) may limit its own easing cycle. The local currency shed 28.5 centavos from its previous finish to close at 59.22 against the greenback, beating the previous record low of 59.17 seen last Nov. 12.
Total trading volume stood at $1.1 billion, lower than the preceding session’s $1.4 billion.
The depreciation happened a few days before the BSP’s final rate-setting meeting for the year on Dec. 11.
All 13 economists surveyed by the Inquirer expected the powerful Monetary Board to slash the benchmark rate—which guides bank lending costs—by a quarter point to 4.5 percent at the policymaking body’s meeting later this week.
If the strong consensus is right, it would bring the cumulative reduction since the easing cycle started in August last year to 2 percentage points.
“The peso reached new lows today as market views firmed that the BSP will very likely deliver a rate cut,” a trader said.
“Adding to this renewed weakness is the potential citing of upside US inflationary risks during this week’s Fed presscon following the release of still above 2 percent core PCE (personal consumption expenditures) inflation, which is the key inflation metric being monitored by the US central bank,” the trader added.
A weaker peso carries mixed consequences for the Philippines.
It boosts the domestic value of remittances sent home by millions of overseas workers, supporting consumption in an economy that relies heavily on these cash transfers.
But it also risks driving up import costs and reigniting inflation. Prolonged depreciation, meanwhile, inflates the peso value of foreign debts held by the government and private firms.
As it is, the BSP has enough space to deliver a fresh cut to shore up growth, which slumped to a four-year low of 4 percent in the third quarter amid an ongoing graft scandal.
Ahead of the central bank’s next meeting, state statisticians reported that consumer prices rose 1.5 percent from a year ago in November, the softest pace of increase in four months.
A widely expected rate cut by the Fed at its Dec. 9 to Dec. 10 meeting could also give the BSP more confidence to ease further with fewer currency risks.
But some observers believe the Fed’s policy committee could be sharply divided, and that this week’s widely anticipated easing may be followed by a pause.
The Philippine central bank earlier signaled it would allow market forces to determine the exchange rate, intervening only if a sustained downturn threatens to fuel imported inflation rather than to smooth out day-to-day volatility.
“Exchange rates might move between 59.10 and 59.35,” another trader said.
