The Philippine peso closed at a new four-month high against the US dollar ahead of the Bangko Sentral ng Pilipinas’ decision Thursday to reduce its overnight borrowing rate by 25 basis points for the first time in more than two years.
The peso closed at 56.90 against the US dollar, up from 56.95 Wednesday. The local currency has been appreciating since last week after the government announced a second-quarter gross domestic product growth of 6.3 percent, which represented an uptick from 5.7 percent in the first quarter.
Strong gross international reserves amounting to over $104 billion as of end-June and expectations of BOP surplus this year are also supporting the value of the peso, according to analysts.
The US Federal Reserve was widely expected to also reduce its own interest rates in September, allowing regional currencies to recoup some of their previous losses against the greenback.
The BSP, however, made the first move in its policy meeting Thursday and signalled another 25-bps cut later this year.
Oxford Economics said the earlier-than-expected rate cut could provide some support for domestic growth, but may intensify the still-elevated domestic inflation and the depreciation pressure on the peso.
“The rate cut could also bring some downward pressure on the Philippine peso, despite the recent appreciation against the US dollar. As the BSP has cut rates ahead of the Fed, which we expect to kick off its easing cycle in September, the peso might retreat from the recent gains in the near term. Nevertheless, the exchange rate passthrough to inflation has been very limited. To support domestic growth, we expect one more cut [25bps] in Q4,” Oxford Economics said.
BSP Governor and Monetary Board chairman Eli Remolona Jr. said while the 25-basis-point reduction would not have an immediate impact because of the lag between the BSP policy and banks’ actual interest rates, it would help support economic activity in 2025 by making the lending rates lower and credit easier.
“By the way, the most relevant policy horizon for us is actually 2025,” Remolona said. “Because there are long lags in the transmission mechanism, what we made today will mainly affect 2025.”
The interest rates on the overnight deposit and lending facilities were also reduced to 5.75 percent and 6.75 percent, respectively.
Remolona said the BSP was trying to avoid upcycle decision. “We avoid upcycle decisions as much as we can. Upcycle decisions are either you think you fell behind the curve or you’re facing a hard landing,” he said.
The BSP said inflation is on a target-consistent path, with current macroeconomic outlook supporting a calibrated shift to a less restrictive monetary policy stance.
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