Tightening bias to limit peso clawback – ING

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The threat of a further tightening bias by the central bank may limit the recovery of the Philippine peso this month after losing steam in September, ING Bank said.

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Analysts in ING Bank’s latest market view see continued monetary policy tightening by the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) despite the slight softening of inflation to 4.4 percent in September from 4.9 percent in August.

Joey Cuyegkeng, ING Bank Manila senior economist said the milder September inflation alone is unlikely to convince the BSP-MB to take a pause from that policy stance at the scheduled October 23 policy rate meeting.

He said he sees the peso appreciating only slightly because of constraints posed by the likelihood of a further tightening in policy rates.

The “BSP would look at indications of a trend. A downward trend (in inflation) would argue for a pause,” he said.

But in this case, Cuyegkeng said that only a limited appreciation of the Philippine peso may be expected as the threat of BSP tightening would keep offshore investors cautious in taking local currency positions in the Philippine financial markets.

If there are portfolio inflows, the ING economist noted, the peso appreciation would be limited and consequently, the local currency would be mildly stronger but unlikely to claw its way back up from the weakness it demonstrated in September.

The Department of Finance’s chief economist and undersecretary Gil Beltran, however, said last week the easing of inflation in September may provide the central bank some leeway in its monetary policy and allow the economy to regain pace in the second half of the year.

He said “the economy successfully reversed inflationary expectations through a decisive reduction in food inflation in September,” and that this favorable development may enable the BSP to avoid further tightening its monetary policy.

The peso lost its steam in September against the stronger US dollar as investors took note of the recovery trend in the United States, giving the market reason to speculate that the US Federal Reserve is likely to start raising interest rates earlier than expected. That makes the US dollar more attractive to currency traders.

On September 29, the peso hit its weakest level in six months at P44. 99 against the dollar.

Sharing Cuyegkeng’s view, Tim Condon, ING regional economist, said the threat of a BSP tightening diminishes the attractiveness of peso-denominated financial assets, which will limit the currency’s clawback of what it lost in September’s 3.06 percent depreciation. The last trading on the Philippine Dealing System showed that the peso remained weak as it closed at P44.77 against the dollar on October 10 from P44.62 per dollar the previous day.

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