The Bangko Sentral ng Pilipinas turned more cautious after the peso weakened recently as a result of the Middle East conflict that forced investors to seek the dollar as a safe haven, according to global advisory firm Oxford Economics.
Oxford Economics said the BSP, which reduced its policy rate by 25 basis points on Thursday, may delay further action until the fourth quarter because of the pressure on the local currency.
“While the BSP does not explicitly use the policy rate to influence the exchange rate, the pass-through effect of a weaker peso on inflation remains a concern. Therefore, we believe the BSP is likely to adopt a more cautious approach while maintaining an easing bias. We expect the next 25bps rate cut to take place in the fourth quarter,” Oxford Economics said.
The peso has come under renewed depreciation pressure, as risk-off sentiment prompted capital outflows, it said. It said the peso has depreciated by 1.7 percent since Friday.
BSP Governor Eli Remolona said, however, it is “futile to intervene” when the depreciation is driven by a strong dollar linked to safe-haven flows.
The peso fell to as low as 57.45 against the US dollar Thursday before rebounding to 57.14 Friday.
Oxford Economics said the Middle East tensions, driving up oil prices and fueling risk-off sentiment, mean that both inflation and peso depreciation risks are tilted upwards.
Brent crude has climbed to around $77 per barrel from $64 per barrel in late May. The Philippines is heavily reliant on fuel imports. “In our worst-case scenario, oil prices could rise to $120 per barrel in third quarter,” said Oxford Economics.
Remolona said the peso and other currencies lost footing against the US dollar because of the Middle East conflict. “In the last few days, we saw the dollar strengthen because of global tensions, so safe haven flows into the dollar,” he said.
“To intervene strongly, just to maintain the exchange rate of the peso to the dollar would be futile,” Remolona said.
If the peso continues to depreciate, Remolona said the central bank would have to intervene “more seriously,” considering that the pass-through effect of peso depreciation “has come back to haunt us.“
The Philippine Statistics Authority (PSA) earlier reported that the inflation rate slowed to 1.3 percent in May from 1.4 percent in April, bringing the five-month average to 1.9 percent.
Remolona said if the “bad scenario” does not materialize, the BSP’s Monetary Board would continue to cut the policy rate.
The Bangko Sentral ng Pilipinas (BSP) has adopted a more cautious stance after the peso weakened due to escalating tensions in the Middle East, which pushed investors toward the U.S. dollar as a safe haven, Oxford Economics said.
