Home / Top News / Peso weakness no cause for worry, says BSP chief
The governorship of the Bangko Sentral ng Pilipinas is passed on from Amando M. Tetangco Jr. to Nestor A. Espenilla Jr. on July 3. Espenilla joined the BSP in 1981 and steadily rose through the ranks until he was appointed Deputy Governor in 2005. Espenilla succeeds Tetangco as fourth governor of the BSP since its establishment in 1993.

Peso weakness no cause for worry, says BSP chief

There is no worry in the peso value despite its nearly 11-year low close to a greenback last Thursday when it finished at 50.67 per $1 from 50.60 a day ago and already near its 50.73 record close on Sept.1, 2006, Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. said.

Espenilla said “the latest peso movements broadly reflect prevailing market conditions and underlying economic fundamentals” and is “in line with BSP exchange rate policy.” “BSP is, nevertheless, actively managing excessive volatility.

This is business as usual,” he said. He traced the peso’s weakness to the normalization of US interest rates.

”There is also growing policy convergence with Europe and even Japan,” he added.

The Fed has increased its key rates by a total of 100 basis points since December 2015, after keeping rates between zero to 0.25 percent starting December 2008.

Its Federal Open Market Committee (FOMC) hiked key rates by 25 basis points each in December 2015, December 2016, and March and June 2017 on continued improvement of the world’s largest economy.

Federal Reserves Chair Janet Yellen, after the Committee’s meeting last June 13, also announced the possibility of scaling back the central bank’s balance sheet.

Based on the minutes of the Committee’s meeting last June, which was released Wednesday, FOMC members are united in the proposal to reduce the Fed’s securities holdings and this, a trader said, further backed the US dollar against other currencies in Asia, among others.

The trader added that any cut in the Fed’s balance sheets is equivalent to a rate hike.

BMI Research adjusted its end-2017 forecast for the peso against the US dollar from 50 to a greenback to 50.50 but stressed that it remains positive on the local currency “in total return terms.”

In a research note, one of the units of Fitch Group said it continues to have “neutral view” on the local currency, which is seen to average at 50.75 to a dollar in 2018, a depreciation from its earlier forecast of 49.75.

“While we no longer forecast slight appreciation for the peso in spot terms over the coming quarters, we remain bullish on the currency in total return terms,” it said. The peso ended last week at 50.47 against the greenback, a tad better than its 50.53 finish last Thursday.

BMI noted that the local currency is one of the worst-performing Asian currency to date after breaking the 50-level last June but pointed out that “it has still outperformed the dollar in total return terms” in line with the research firm’s projection.

”While there is scope for further spot weakness over the coming months given rising real rates in developed markets, we do not expect this weakness to be excessive,” it said. Last June,, the Federal Reserve hiked its key rates by another 25 basis points to one to 1.25 percent.

It is the third increase after the same amount last December and March. Some analysts still consider another hike in the Fed rates this year given the hawkish statements from Fed officials. However, BMI said it is not among those that forecast another Fed rate increase this year.

It, on the other hand, projects the BSP to hike its policy rates by 50 basis points before the end of this year.

To date, the BSP’s overnight borrowing or reverse repurchase (RRP) rate is three percent, the overnight lending or repurchase (RP) rate is 3.5 percent and the rate of the special deposit account (SDA) is 2.5 percent.

BMI said the projected hike in the BSP rates “should see real interest rate spread move in favour of the PHP.”

“While we are revising our forecast for the peso to reach P50.50 per $1 at end-2017, up from 50 per $1 previously, we remain constructive on the unit in total return terms,” it said.

It said the balance of risks on the local unit “are more or less balanced” with manageable inflation, strong domestic output, steady remittance inflows and strong foreign direct investment inflows on one hand and the military conflict in Mindanao, President Duterte’s war on drugs, and political opposition in the legislative branch on the other.

Espenilla, meanwhile, said an adjustment in banks’ reserve requirement ratio (RRR) is still in the offing along with other monetary policy tools as part of the BSP’s mandate to ensure price stability and sound monetary policy.

Espenilla said the central bank has “a lot of available tools for the conduct of monetary policy.” One of these tools is the RRR, and a cut of which has been suggested for years now. He said adjustment of the RRR will be done “to an appropriate time frame.” Espenilla, however, said the chang es will “not going to happen immediately.”

”It has to be within a reasonable range because it is important. We have one of the highest in the world. It is an inefficiency to the financial system,” he said. To date, RRR for universal and commercial banks (U/KBs) is 20 percent.

The last time the BSP adjusted the RRR is in May 2014, when it was hiked by a total of 50 basis points, 25 basis points each in March and May, as growth of domestic liquidity grew stronger than in the past years at a level of more than 20 years.

Espenilla said monetary officials ”need to find a path to lower the RRR without compromising price stability.”

“We are having engaged discussions on that. I’d like to see that happen but it is a discussion in the MB (Monetary Board),” he added.

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