Philippine Peso Needs a More Hawkish Central Bank to Stem Losses

Set of Philippine bank notes. (Photo: Getty Images)

By Masaki Kondo

The Philippine currency and bond markets will need a more hawkish tone from the central bank this week to stem their losing streak, as investors fret over whether policymakers are softening their fight on inflation.

The peso is at a 12-year low against the dollar even after the May 10 rate increase as central bank officials appear to clash over the prospects of further tightening. Persistent weakness in the bond market, where yields are at seven-year highs, further signal skepticism about the effectiveness of last month’s rate hike in slowing inflation.

With May consumer prices rising 4.6 percent, the fastest pace since at least 2013, BSP’s policy rate of 3.25 percent is deep in negative territory after adjusting for inflation. The rate appears too low for an economy that has expanded more than 6 percent each quarter since mid-2015.

Such concerns are reflected in the bond market where investors are demanding higher compensation for the risks of shrinking real returns. The benchmark five-year bond yield soared to 5.93 percent on June 14, the highest since 2011.

The Bangko Sentral ng Pilipinas will hold its rate meeting on June 20, a day earlier than previously scheduled. Signals from policymakers have been mixed.

Governor Nestor Espenilla said he isn’t closing the door on another rate hike in coming months and the BSP will examine “all the potential drivers of future inflation” at the June meeting. But Deputy Governor Diwa Guinigundo is less hawkish, maintaining that the central bank doesn’t use policy rates to arrest oil prices, and the May rate hike was sufficient to bring down inflation in 2019.

Crude prices have stayed above $60 per barrel for most of the second quarter and economists are expecting inflation to exceed BSP’s target range of 2 to 4 percent this year.

While ING Groep NV and Nomura Holdings Inc. expect the BSP to tighten this week, Scotiabank predicts the central bank to keep rates on hold and the peso to fall toward 54 ahead of the policy meeting. The currency traded at 53.27 against the dollar Thursday before a public holiday the next day.


To contact the reporter on this story: Masaki Kondo in Singapore at

To contact the editors responsible for this story: Tan Hwee Ann at; Patricia Lui, Shikhar Balwani

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