The local currency is expected to end the year’s trade at 52 to a dollar this year, on the back of the current-account balance’s deterioration, according to an international bank.
In its recent economic outlook on Asia, the ANZ Bank said the peso exchange rate will continuously weaken toward the end of the year and hit 52 to a dollar by year-end. On Tuesday the local currency traded at 51.33 against the US dollar, slightly strengthening from the 51.39 to a dollar in its last trading day.
The expectation of a weaker peso came as the ANZ Bank said that, although current-account balance rose to surplus in the second quarter of the year, the risk of a deficit remains due to continued strong import growth.
“Domestic interest rates are not high enough to attract sufficient foreign portfolio flows to fund the deficit,” the bank said.
“While the tax reforms should boost sentiment when they are implemented next year, we remain watchful of persistent import growth,” it added.
Thus, the weaker current-account balance due to expectations of import-growth acceleration will force the Bangko Sentral ng Pilipinas (BSP) to hike rates to prevent the peso from falling further toward 2018.
“If the BSP does not hike rates as we expected, then the Philippine peso may weaken more than our forecast next year,” the bank said.
The bank added that considering current fundamentals, monetary tightening is now viewed as “necessary” for the economy with the weaker peso and the upward inflation trend.
ANZ Bank forecasts a total rate hike of 50 basis points in the first quarter of next year.
ING Bank Manila economist Joey Cuyegkeng also believes that the BSP should hike its rates soon not only because of high inflation and the weakening of the peso, but also to respond to monetary indicators, such as strong liquidity and loan growth. In the near-term, meanwhile, the peso is expected to behave within range with the view that the BSP will eventually do a preemptive move to stabilize inflation expectations, Cuyegkeng said.