The Philippine peso may come under pressure to depreciate soon as the US Federal Reserve is expected to aggressively raise interest rates again this week, after trading relatively flat against the US dollar last week.
The local currency has lost 10.4% of its value against the greenback since the start of this year, when it was trading at 51:1. In June alone, the peso lost 5% against the dollar.
As U.S. inflation moves further away from the U.S. government’s 2% target, reaching 9.1% in June, analysts believe the U.S. Fed will again raise the U.S. federal funds rate by 0.75 percentage points in its July 27 meeting, just like they did in the previous meeting.
“Nevertheless, we believe this will be the last 75 basis point (bp) hike and expect 50bp hikes in September and November, with a final 25bp move in December,” ING Bank said in a commentary.
Rising trend in US rates
If these materialized, US rates would hit 2.5% to 2.75% this week, dropping from 1.75% to 2%. And by the end of this year, the range would be 3.25% to 3.5%.
The Fed’s expected move this week will negate the BSP’s surprise off-cycle move on July 14, which took the local key rate to 3.25% from 2.5%.
In addition, the expected move by the Americans will again narrow the spread between US and Philippine rates to just 0.5%, which analysts have partly blamed on the volatility of the peso over the past six weeks.
According to UK-based Oxford Economics, the Philippine peso was the worst performing Asean currency, depreciating 6.2% against a very strong US dollar on June 10, when the peso fell to 53: $1, until July 14, when the BSP went hawk.
“Among ASEAN economies, the Philippines is the most vulnerable to a weaker currency given that it is the largest importer of food and energy and these goods account for around 44% of the consumer spending basket. “, said Oxford Economics.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the peso-dollar exchange rate was positively correlated with the US federal funds rate.
“There has never been a case where the local policy rate is lower than the US federal funds rate, at least in the last 20 years or even before that,” Ricafort said.
This was “given the difference in the credit ratings of the United States and the Philippines – where a certain risk premium relative to the United States is demanded by international investors and global fund managers – as well as the difference in the long-term inflation outlook for the United States. two countries,” he added.
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