2 weeks ago
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While the Philippine economy is expected to expand by 6.2 percent this year, Sun Life Investment Management and Trust Corp. (SLIMTC) said the peso could depreciate to as low as 61 against the US dollar.
“Growth will improve to 6.2 percent from 5.6 percent last year. However, peso will weaken and will be in the range of 58 to 61 this year because of a very strong dollar environment globally,” said Ritchie Ryan G. Teo, SLIMTC’s chief investment officer, during a briefing on Friday, Feb. 28.
SLIMTC President Michael Gerard D. Enriquez told reporters that a weaker peso would not be highly inflationary if it slides gradually.
“I think the biggest worry of the peso is really how fast the depreciation is. As long as the depreciation is slow and steady, I think it should not really affect inflation too much,” Enriquez said.
Enriquez argued that a weaker peso will definitely affect the prices of goods, “especially since we are a highly import-dependent country.” But if the depreciation remains gradual, the impact on inflation will be minimal “as opposed to wild swings on the peso—and that is when the BSP [Bangko Sentral ng Pilipinas] would start to intervene.”
Fed-aligned moves
As such, the local trust arm of Canadian insurance giant Sun Life expects the BSP to move in lockstep with the US Federal Reserve (Fed). “They [BSP] cannot be ahead because they are also wary of the depreciation of the currency,” Teo said.
“If the BSP cuts ahead of the Fed, the natural effect probably would be weaker peso given that the interest rate differential gets lower. If there will really be extreme tariff measures that will increase inflation, then probably they won’t cut first. They will put [the key policy rate] on hold because they will prioritize flexibility,” he explained.
Given this, SLIMTC is looking forward to the BSP slashing the key interest rate by up to 75 basis points (bps), aligning with the Fed’s policy direction.
Last month, the BSP left the policy rate unchanged at 5.75 percent after it made three successive quarter-point cuts last year. Teo said a cut in April is “possible because we’ve seen inflation numbers still continue to be within their range.”
For this year, the BSP’s Monetary Board (MB) still has five remaining policy meetings: April, June, August, October, and December.
“They have the leeway to [cut], with the policy rate at 5.75 percent and inflation below 3.5 percent, leaving some room for adjustments. However, maintaining flexibility remains very important. It’s still prudent to have that flexibility on hand,” said Teo.
But Enriquez and Teo said three quarter-point cuts might be a bullish move for the central bank, noting that SLIMTC anticipates a total 50-bp cut as the most probable scenario.
Although the local currency might further depreciate after the expected cuts in the benchmark interest rate, a more robust economy seen to accelerate faster could offset this.
“The Philippines is still very much consumption driven. So with inflation rates growing lower, we think that consumption will be rebounding for this year,” Teo said.
