Peso slide raises prospect of "jumbo" BSP hike

Further depreciation of the Philippine peso could prompt the Bangko Sentral ng Pilipinas (BSP) to adopt a more aggressive monetary policy response at its meeting this Thursday, 22 October, including a “jumbo” 50-basis-point rate hike if the currency continues to weaken.

Bank of the Philippine Islands lead economist Emilio Neri Jr. said in a Friday commentary that the peso’s recent slide—breaching the P63-per-dollar level for the first time last week and closing at a record-low P63.06 on Thursday—strengthens the case for additional BSP rate hikes at its remaining two policy meetings this year.

“The magnitude of the rate hike next week will likely depend on the behavior of the Peso in the coming days,” he said.

“If the Peso depreciates further and moves closer to 64, the BSP may consider a 50 basis point hike on Thursday,” he added.

Although the peso recovered from its record-low close to P62.985 last Friday, it hit a fresh intraday low of P63.23 against the US dollar, surpassing Thursday’s trading low of P63.15.

Despite the stronger closing rate, the full-day weighted average rose from P63.049 on Thursday to P63.068 on Friday, suggesting that transactions over the session reflected a slightly weaker peso overall. The currency has remained sensitive to developments stemming from the ongoing war in the Middle East, including elevated global oil prices and safe-haven demand for the US dollar.

The BSP and Neri have cautioned that an expected severe El Niño event in the coming weeks poses a major upside risk to inflation, which reached a three-year high of 7.2 percent in September amid broader uncertainty surrounding the Gulf conflict.

Neri said a larger rate hike could also serve as a preemptive measure against second-round inflationary effects and a rapid de-anchoring of inflation expectations, particularly ahead of a potential supply shock from El Niño. The BSP’s August rate hike was similarly described by Governor Eli Remolona Jr. as “preemptive” in light of El Niño risks and the implementation of the first tranche of wage increases in Metro Manila.

Neri said the outlook points to further central bank rate hikes, with the BSP’s target reverse repurchase rate potentially reaching 6 percent by year-end if tensions between the United States and Iran continue to escalate.

“Regardless of whether the BSP delivers a 25 or 50 bp hike next week, the balance of risks increasingly points to further tightening in the next 6 months,” he said.

“Under a more adverse scenario, the policy rate could potentially end the year at 6% if the Middle East conflict escalates.”

Remolona recently said the prospect of a “super” El Niño remains a key consideration in the BSP’s policy decisions. He also acknowledged the trade-offs the central bank faces amid the broader economic downturn.

“It's far too easy for us to just please the crowd. The crowd seems to want low interest rates, strong peso, and low inflation,” he said.

“But we have to do the right thing for the economy. So we won't be able to make you guys happy all the time. And that's why we have independence.”