Yuan devaluation seen weighing on BSP policy

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China’s move to devalue its currency is likely to influence the central bank’s policy stance when the Monetary Board meets Thursday, August 13, as scheduled, private analysts said.

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They foresee the board taking a cautious approach to any decision to change its monetary policy settings after the currency markets across the region reacted strongly to the slide in the yuan, aligning themselves with the easing to avoid lagging in competitiveness.

Analysts from ING Bank Manila and the Bank of the Philippine Islands (BPI) said the Monetary Board may look particularly at the potential impact of the yuan’s depreciation on the Philippine peso.

“The recent reaction of the Philippine peso to externally driven developments like this morning’s PBOC [People’s Bank of China] weakening of the Chinese yuan may bring the BSP-MB to be cautious about adjusting the monetary policy settings,” Joey Cuyegkeng, ING Bank Manila senior economist, said.

The PBOC on Tuesday surprised the markets by allowing the yuan—also known as the renminbi—slide by almost 2 percent against the US dollar, making the country’s exports more attractive overseas. China’s central bank set its daily reference rate for the yuan on Tuesday at 6.2298 to $1, compared with 6.1162 yuan the previous day, effectively 1.86 percent lower.

The move dragged regional currencies, pulling the peso down to a five-year low of P45.93 to $1 on Tuesday.

On Wednesday, the PBOC did it again, letting the yuan slump to 6.3306 to $1 and dragging the rest of the regional currencies, particularly the peso, down.

The peso breached the P46 to $1 level on the Philippine Dealing System on Wednesday morning.

“The local GS [government securities]market is seen consolidating and waiting for the dust to settle after the shakedown from the PBOC move,” analysts from BPI said in a note.

They said market players are looking to the central bank meeting for direction. It has become clear, however, that BSP Governor Amando Tetangco Jr., will be standing pat on Thursday, they added.

Earlier, analysts from Citi, Metrobank Research, Security Bank Corp., University of Asia and the Pacific (UA&P), BPI and BMI Research held a consensus view that the central bank will keep its current policy stance steady at the Thursday meeting.

Since September last year, the BSP has kept its key policy rates for overnight borrowing—or the reverse repurchase (RRP) facility—at 4 percent while the rate for overnight lending—or the repurchase facility—has remained at 6 percent.

The SDA rate and the reserve requirement ratio (RRR) for banks have also been frozen at 2.50 percent and 20 percent, respectively.

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