A STRENGHTHENING Philippine peso is expected to pull down consumer prices and counterbalance the upside risk of inflation, the central bank said in an outlook for the next two years.
The local currency on Friday hit its highest level in nearly five months as it closed at P43.65 against the US dollar, appreciating from Thursday’s P44.19. Friday’s level is the peso’s strongest since December 16, 2013, when it settled at P44.15.
Along with the stock market, the peso gained strength at the end of last week’s trade on the back of a surge in investor confidence after Standard and Poor’s upgraded the Philippines’ long-term sovereign credit rating by a notch, with a stable outlook. Analysts view the rating upgrade to BBB from BBB- as an affirmation of the country’s strong macroeconomic fundamentals.
“A currency appreciation is expected to contribute to lower inflation because of the impact of a stronger currency on prices of imported commodities,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in an email to reporters over the weekend.
A stronger local currency makes dollar inflows less valuable in peso terms and gives more purchasing power to local consumers. It also makes imports more affordable, which then translates to cheaper prices of goods when they are sold in the Philippines.
“While this pass-through from the peso appreciation to inflation has declined over time, it would still be a counterbalance to the upside risks to the inflation outlook that we have noted in our last policy meeting, including that of higher food prices and transport costs,” Tetangco said.
The central bank had forecast that inflation may settle at 4.3 percent this year, and at 3.4 percent in 2015 as the balance of risks to the inflation outlook continued to lean toward the upside, with potential price pressures emanating from the possible uptick in food prices as a result of expected drier weather conditions, as well as pending petitions for adjustments in transport fares and power rates.
The forecasts remain within the central bank’s 3-percent to 5-percent target for 2014 and 2 percent to 4 percent for 2015.