Strong peso seen to rein in inflation

MANILA, Philippines - The strengthening peso should dampen inflation although this may not be enough to offset the risks stoking the rise in commodity prices, the Bangko Sentral ng Pilipinas said.

“A currency appreciation is expected to contribute to lower inflation because of the impact of a stronger currency on prices of imported commodities,” central bank Governor Amando M. Tetangco Jr. said in an e-mail to reporters.

Tetangco made the comment after the peso rose to its strongest level this year on Friday as the market cheered the country’s credit rating upgrade received from Standard & Poor’s.

“While this pass-thru from the peso appreciation to inflation has declined overtime, 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 BSP has forecast inflation to average 4.3 percent this year, above the midpoint of its three to five percent target range. The projection, announced last week, was already an upward revision from the 4.2-percent forecast announced in March.

Tetangco earlier said potential price pressures remain starting with higher food prices due to the El Nino season, the pending power rate adjustments, and the petition for higher transportation fares.

Inflation picked up to 4.1 percent in April from 3.9 percent in the previous month due to higher food and utility prices. This has put the four-month average to 4.1 percent.

The peso on Friday gained 54 centavos to close at 43.65:$1 from its 44.19:$1 finish on Thursday. This is the peso’s strongest level since it closed 43.595:$1 on Nov. 19, 2013.

Traders attributed the strengthening of the peso to S&P’s upgrade of the Philippine credit rating to BBB from BBB- with a stable outlook. The surprise upgrade came as the debt watcher said the structural reforms being instituted by the Aquino administration will likely continue beyond 2016.