Peso may hit P60 per dollar if BSP move diverges from Fed

THE PESO could sink to the P60-per-dollar level if the Bangko Sentral ng Pilipinas’ (BSP) policy diverges from the US Federal Reserve’s actions.

“If the Fed pauses, then we have an excuse to also pause. But if they do not pause, we are forced to good because the interest differential will narrow. If we don’t do that, the peso will hit P60 the next day,” BDO Capital & Investment Corp. President Eduardo V. Francisco told reporters on the sidelines of an event on Wednesday.

BSP Governor Eli M. Remolona, Jr. earlier said it is possible for the peso to fall to the P60 mark versus the greenback, though monetary authorities will ensure that the decline won’t be abrupt.

The BSP’s policy-setting Monetary Board will hold its last review for the year on Dec. 19, a day after the Federal Open Market Committee’s Dec. 17-18 meeting.

The BSP has cut benchmark borrowing costs by a total of 50 basis points (bps) since kicking off its easing cycle in August, bringing its policy rate to 6%.

Meanwhile, the US central bank began its own rate-cutting cycle with a supersized 50-bp reduction in September and followed it up with a 25-bp cut last month, bringing the fed funds rate to the 4.5%-4.75% range.

Mr. Remolona has said that the BSP could either cut or pause at this month’s meeting amid inflation risks.

For their part, Fed officials this week said that a December rate cut is not set in stone and will be up for debate at their own review.

Mr. Francisco said markets will focus on the policy guidance to be given by both central banks at their meetings this month.

“It’s more on the signaling. Even if they cut rates…, when will that be effective? Banks won’t effectively bring down their rates. There will still be some repricing. It’s more for next year,” he said.

GDP GROWTH
Meanwhile, Mr. Francisco said he expects Philippine gross domestic product (GDP) to grow by 5.7% this year, below the government’s revised 6-6.5% target, following the slower-than-expected 5.2% expansion in the third quarter.

In the first nine months, GDP growth averaged 5.8%. To meet the lower end of the government’s revised target band, the economy would need to grow by 6.5% in this quarter.

Mr. Francisco said they remain hopeful that GDP growth would pick up this quarter, with possible drivers being stronger private sector spending during the period and high liquidity in the financial system.

“The forecast is 5.7% full year, but that’s assuming that fourth-quarter growth is bad. I just want to be pleasantly surprised that the fourth-quarter growth is good,” he said.

“If interest rates go down further, if Governor Eli is going to bring down reserve requirements, every 1% is almost P100 billion to P200 billion… We will have more liquidity in the system. Even as of the other day, when we were checking, there’s P2 trillion in excess liquidity in the system. There’s a lot of money. It’s all in private hands, of course. The government is cash-strapped, fiscally challenged, but that’s why they say they want the private sector to step in. The fact that there’s P2 trillion there, that’s more private sector money floating,” Mr. Francisco added.

Mr. Remolona has said that big banks’ reserve requirement ratio (RRR) could be brought down to as low as zero before his six-year term ends in 2029 from a high of 20% in 2018.

The BSP in October cut the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%.

It also brought down the RRR for digital banks by 200 bps to 4%, while the ratio for thrift lenders was reduced by 100 bps to 1%. Rural and cooperative banks’ RRR was cut by 100 bps to 0%.

The RRR is the portion of reserves that banks must hold onto rather than lending out. When a bank is required to hold a lower reserve ratio, it has more funds to lend to borrowers. — Aaron Michael C. Sy