‘BSP should avoid rate hikes to defend peso’
The Bangko Sentral ng Pilipinas should avoid using interest rate hikes primarily to defend the peso and instead keep monetary policy focused on inflation, according to Manulife Investments Philippines, as elevated US yields and broad dollar strength continue to pressure the local currency.
Manulife Investments Philippines advises the Bangko Sentral ng Pilipinas (BSP) to refrain from raising interest rates primarily to support the Philippine peso, instead concentrating its monetary policy on curbing inflation. Head of fixed income Jean Olivia de Castro explains that further rate hikes could be necessary if inflation risks worsen, but the central bank must differentiate between ongoing domestic price pressures and short-term currency weakness largely caused by global factors.
"The BSP's main goal should be to keep inflation expectations stable, while acknowledging that much of the peso's weakness is due to global factors like high US Treasury yields and a strong dollar," she states. While raising rates might make peso-denominated assets more appealing and even bolster the peso, excessive tightening risks slowing down the economy.
The central bank should adopt a disciplined, data-driven approach to maintain its credibility on inflation while avoiding unnecessary harm to growth. The peso has been under pressure despite the BSP's tightening measures because higher US interest rates bolster the dollar and make US assets more attractive. Manulife expects the next major shift in global interest rates and currencies to hinge on US labor market data, which investors are monitoring for hints on the Federal Reserve's future actions.
A robust jobs report would likely reignite higher-for-longer rate expectations, maintaining high US yields and putting pressure on Philippine bond yields and the peso. Conversely, a weak labor report could bolster arguments for further Fed easing, providing some relief to fixed income markets and potentially strengthening the peso, assuming global risk sentiment improves.
Manulife projects that despite any short-term volatility subsiding, high global yields, a weak peso, and increased government borrowing will keep Philippine interest rates relatively elevated, even if short-term fluctuations diminish.
Written by urgent.news from Philippine Star Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
