To save peso, Bangko Sentral needs to tighten policy – ING Bank

To protect the peso from the onslaught of a strong US dollar, Philippine monetary authorities are expected to raise policy rates and employ other measures in the first half of the year, according to Dutch financial services giant ING Bank NV.

 

The central bank “could tighten policy or employ macro-prudential measures as early” as the first half  if the peso hits 46 per-dollar level, Jose Mario Cuyegkeng, economist at ING in Manila, said at an economic briefing Wednesday in Makati City.  

 

ING noted the weakening peso would likely force Bangko Sentral ng Pilipinas to raise the policy rate by a total of 50 basis points to 4 percent, ending an regime of record-low rates since October 2012.  

 

However, Cuyegkeng told reporters after the briefing he doesn't expect the Monetary Board imposing a rate increase during the February 6 policy meeting next. 

 

The Manila-based economist said “they are not privy” to what type of macro-prudential measure monetary authorities may employ, noting this may have something to do with curbing foreign exchange outflow.

 

Macro-prudential measures include imposing controls on flows of speculative foreign funds in the financial system and do not necessarily involved tweaking policy rates. 

 

In 2012, the central bank excluded foreign funds getting into short-term special deposit accounts and  expanded the computation for real estate exposure while placing a limit on transactions in foreign exchange futures.

 

Speaking to reporters at the central bank Wednesday, Bangko Sentral Governor Amando Tetangco Jr. said the regulator is ready to tap “appropriate” measures in preventing sharp movements in the peso-dollar exchange rate.  

 

Emerging markets in turmoil

The peso is currently trading at over 45  to a dollar level, a rate unseen since September 2010, as foreign funds leave emerging markets while the US Federal Reserve trim its bond purchases on the strength of data that show the world's biggest economy is on track in its recovery. 

 

Earlier this week, India and Turkey surprised the markets when its raised policy rates to curb further depreciation of their currencies. 

 

Timothy Condon, a visiting Singapore-based economist at ING, said the exodus of funds from emerging markets “will be short-lived.”

 

But risks remain including China’s slowing growth that may curb the prospects of emerging economies, particularly in Africa and Latin America, Condon said at the same briefing.  

 

Central bank intervention coupled with inward remittance from overseas Filipinos and outsourcing receipts will cushion the peso from sudden drops against the dollar, Cuyegkeng said. 

 

ING sees the Philippine currency settling at 45.2:$1 at year's end. 

 

Apart from directly address exchange rate volatility, higher policy rates also helps keep “inflation expectations anchored,” said Cuyegkeng, noting likelihood that consumer prices accelerate as much as 5.1 percent in the coming months and averaging 4.6 percent in 2014. 

 

The central bank expects inflation to settle within 3 to 5 percent this year. 

 

Fundamentals 'discounted'

ING, meanwhile, still sees the Philippine economy expanding robustly at 6.7 percent this year, in line with government’s 6.5 to 7.5 percent growth goal. 

 

However, Cuyegkeng said the country’s strong fundamentals have been “discounted by the market.” 

 

Sustaining strong growth and addressing the Philippines’ lagging infrastructure are keys “to attracting more investments,” he added. 

 

“We’re still at an area where we need to see things move,” Cuyegkeng noted. – VS, GMA News