Medalla wary of exchange rate impact on inflation

MANILA, Philippines —  Monetary authorities have done enough to stabilize the peso that hit a new all-time low on Friday despite aggressive rate hikes from the central bank, according to Bangko Sentral ng Pilipinas  (BSP) Governor Felipe Medalla.

Prior to the peso’s weakening, Medalla said it emerged as the third or fourth least depreciated currency after (BSP) delivered a huge 75-basis-point rate hike during an off-cycle rate-setting meeting last July 14.  The local currency  appreciated  back to the 55 to $1 level.

But the peso  again weakened to the 56 to $1 level amid a hawkish US Federal Reserve and strong demand for the greenback as imports continued to surge.

“We can say we have done enough. These is no peso problem, it’s a dollar problem,” Medalla said  during the virtual Reuters NEXT Newsmaker event.

If that is the case, Medalla said the response would usually be no reaction.

The central bank’s Monetary Board has so far raised key policy rates by a cumulative 175 basis points that brought the overnight reverse repurchase rate to 3.75 percent from an all-time low of two percent.

The rate hikes included the huge 75-basis point increase last July 14, followed by another 50-basis-point hike last Aug. 18.

The BSP earlier said inflation likely settled between 5.9 and 6.7 percent in August after quickening to 6.4 percent in July from 6.1 percent in June. Inflation averaged 4.7 percent in the first seven months of the year, way above the BSP’s two to four percent target range.

Based on its assessment last Aug. 18, the BSP Monetary Board raised its inflation forecast to 5.4 percent instead of five percent this year but lowered its projections to four percent instead of 4.2 percent for 2023 and to 3.2 percent instead of 3.3 percent for 2024.

According to Medalla, inflation could stay elevated and above the target for the first half of next year before easing toward the midpoint of the two to four percent target by the second half.

The local currency has emerged as the third worst performing currency in the region this year. The peso has depreciated by 11.3 percent since ending 2021 at 50.999 to $1.

Medalla, who chairs the seven-member Monetary Board, said authorities are closely watching external developments particularly the impending rate hike by the US Fed to fight inflation.

During the annual symposium in Jackson Hole, US Fed chair Jerome Powell signaled the US central bank could impose more huge interest rate hikes in the coming months as it is resolutely focused on taming the highest inflation in four decades.

Medalla said, that the impending rate hike by the US Fed would be a “big factor” during the next scheduled rate-setting meeting of the BSP Monetary Board on Sept. 22.

“You cannot not react to what the Fed is doing,” Medalla said.

Medalla said he is personally giving inflation more weight than economic growth.

“Which is more scary, us overshooting or being surprised on the inflation side or us getting much lower growth rate than 6.5 percent? Depending on the peso, you may give one higher weight than the other. Personally I would give more weight on inflation,” Medalla said.

The country’s gross domestic product (GDP) growth averaged 7.8 percent in the first half  despite slowing down to 7.4 percent in the second quarter from 8.2 percent in the first quarter.

Economic managers penned a lower GDP growth of 6.5 to 7.5 percent for this year and 6.5 to eight percent starting next year. The country’ emerged from the pandemic-induced recession with a GDP expansion of 5.7 percent last year after contracting by 9.6 percent in 2020.

After hitting an intraday low of 56.90 to $1 last Friday, China Bank chief economist Domini Velasquez said the peso is likely to test the 57 to $1 level this week.

Last Friday’s close of an all-time low of 56.77 to $1 erased the previous record of 56.45 to $1 in October 2004.