The continued decline of the Peso may push up prices

By means of Aaron Michael C. Sy, News reporter

A PROLONGED depreciation of the Philippine peso could fuel inflation, although it could also benefit the economy by boosting export earnings, analysts said.

“We see the peso’s weakness against the dollar continuing,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said in a Viber message on Wednesday.

“The BSP must be ready, as they have done in the past, to intervene and combat the volatility and speculative play,” he added.

Diwa C. Guinigundo, country analyst at GlobalSource Partners, said the peso’s weakness could boost export competitiveness “as long as its pass-through to inflation does not exceed the external competitiveness benefits.”

“That is growth positive,” he said in a Viber message. “As long as the peso avoids a sharp and prolonged depreciation, the impact on inflation could be manageable. Otherwise, imported inflation could be very problematic.”

The peso closed at P58.06 against the dollar, 21 centavos stronger than Tuesday when it closed at its weakest level in 18 months, according to data from the Bankers Association of the Philippines.

The currency has depreciated by P2.69 this year from its closing rate of P55.37 per dollar on December 29, 2023.

Mr. Guinigundo, a former central bank deputy governor, said the peso could strengthen if the Bangko Sentral ng Pilipinas (BSP) becomes more aggressive again.

“Any hint of the BSP’s less aggressive stance could move the market,” he added.

BSP Governor Eli M. Remolona Jr. said last week that the central bank could cut rates as early as August and earlier than the Fed amid an easing of interest rates.Flat. He also expects one or two rate cuts of 25 basis points in the second half of the year.

The peso is likely to be pulled down by the widening balance of payments (BoP) deficit, Mr Guinigundo said.

The payment position expanded to $639 millionFThis fell in April from the $148 million gap a year earlier, according to BSP data. This was also a reversal from March’s $1.17 billion surplus.

The BSP expects the country’s BoP position to end at a level of $700 millionFcicit, which corresponds to 0.1% of economic output.

Juan Paolo E. Colet, chief executive of China Bank Capital Corp., said the peso’s weakness is aFfect companies with dollar loans.

“The weakness of our currency will affect companies that have borrowed in US dollars but whose revenues are mainly in pesos, as it becomes more expensive to [pay] the blame,” he said in a Viber message.

The peso has been weaker than its regional counterparts, depreciating mainly due to the Philippine central bank’s dovish tone, Emilio S. Neri Jr., chief economist at the Bank of the Philippine Islands, said in a Viber message .

“The declining current account deficit of the Philippine economy, combined with a possible weakening of the upcoming US economyFThis could limit short-term exchange rate overshoot against the expected medium-term trend,” he added.

The BSP estimates a current account deficit of $6.1 billion this year, or 1.3% of economic output.

Companies welcome an earlier rate cut by the BSP as it is a sign of easing inflation, Jonathan L. Ravelas, senior advisor at Reyes Tacandong & Co., said in a Viber message.

Inflation accelerated from 3.7% in March to 3.8% in April, still within the central bank’s target of 2-4% for this year. It was slower than 6.6% a year earlier.

In the first four months, interest rates averaged 3.4%, lower than the BSP’s full-year forecast of 3.8%.

Mr Ravelas said the peso would likely remain at the P58 level as long as the BSP remains dovish.