BSP signals further price hikes, FX moves to defend the peso

Reuters

The Central Bank of the Philippines has indicated that it will resort to further rate hikes depending on the Fed’s action, while also considering proactive market interventions to limit currency losses.

“A strong dollar requires us to make bigger increases in policy rates,” said Felipe Medala, governor of Bangkou Central in the Philippines (BSP) in an interview from New York with Sherry Ann and David Engels of Bloomberg Television. Obviously, the Fed’s policies have affected our choices. We don’t want to match the Fed, at the same time we have to respond.”

The Philippines was one of three Southeast Asian countries to raise borrowing costs on Thursday, with the cumulative BSP increases touching 225 basis points so far this year.

Besides the interest rate, Mr. Medla said the central bank has the option of actively intervening to support the peso, which has fallen to a record low this week amid an exceptionally strong US dollar. The Fed’s hawkish rhetoric on controlling inflation has put more pressure on Asian currencies, including the Japanese yen, while economies facing current account deficits are particularly vulnerable to the sell-off.

“We have been very active this week,” Medala said of the Special Facilities Bank’s intervention in the foreign exchange market, adding that moves are likely to be more active in the coming days.

“Obviously we are interfering in the forex market. One approach is to intervene more aggressively because volatility is now much higher,” the governor said. Another approach, he said, is to reduce liquidity in the local currency by borrowing more from the central bank’s weekly auctions, so there will be less pesos to chase the dollar.

The peso rose as much as 0.3% in Friday’s trading to 58.30 per dollar.

Mr. Madaleh sees inflation returning within his target of 2%-4% next year, saying it is likely to be close to 3% from 4%.

While higher price growth weighs on consumption, the economy is still seen as among the bright spots in Asia, indicating room for further monetary tightening.

Filipino economics executives are joining President Ferdinand R. Marcos, Jr., on international trips this month, in part to attract investors. Earlier this week, Marcos described the Philippines as a “vibrant economy” as its government prepares for an “A” credit rating in the medium term. – Bloomberg

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