Currency depreciation may put central banks under pressure to tighten

By Luisa Maria Jacinta C. Jocson, Reporter

CONTINUED CURRENCY depreciation in Asia and the Pacific could add to inflationary pressures and prompt central banks to raise interest rates again, the International Monetary Fund (IMF) said.

“If exchange rates depreciate and pass through to higher inflation, then there is reason to tighten monetary policy. Otherwise, allow the exchange rate to act as a buffer against shocks. I think that could hold you in good stead,” Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, said in a webinar on Tuesday.

“Interest rate differentials will likely put pressure on currencies to depreciate. This can create a dilemma for Asian central banks, including for the Philippines,” he added.

On Tuesday, the peso closed at P57.76 against the dollar, weakening by 8.5 centavos from its P57.675 finish on Monday. This month, the peso depreciated to the P57 level for the first time since November 2022.

“It’s important to allow the exchange rates to be the buffer against shocks so that you can meet your price stability objectives, your external objectives and so on,” Mr. Srinivasan said.

“If the exchange rate movements are leading to higher pass-through, then there might be a reason to tighten interest rates. But otherwise, just look to see what’s happening to domestic inflation and tailor your policies accordingly,” he added.

The Monetary Board has hiked borrowing costs by 450 basis points from May 2022 to October 2023, bringing the policy rate to a near 17-year high of 6.5%.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. has said that they “stand ready to manage any unnecessary movement and excessive volatility.”

The IMF said that central banks should focus on domestic price stability and should not be “overly dependent” on the US Federal Reserve’s own policy moves.

“I think that’s the point we’d like to make here, that don’t get yourself too tied to what the Fed does,” Mr. Srinivasan said.

Mr. Remolona had said that the peso’s recent drop was due to the strong US dollar and expectations of rate cut delays by the Fed.

Markets are now pricing in the chance of a rate cut in September from initial expectations of June. US Federal Reserve Chairman Jerome H. Powell earlier said they might have to keep “restrictive” policy rates for longer amid sticky inflation.

Mr. Srinivasan also said that most Asian countries are now better placed to cope with exchange rate movements due to “fewer financial frictions and better macro fundamentals and institutional frameworks and should continue to allow the exchange rate to act as a buffer against shocks.”

GROWTH OUTLOOK
Meanwhile, the IMF kept its growth forecast for the Philippines at 6.2% for both 2024 and 2025.

“The Philippines is one country which has done very well in terms of the growth is being resilient (and) inflation is coming down,” Mr. Srinivasan said.

This year, the government is targeting a 6-7% growth. First-quarter gross domestic product (GDP) data will be released on May 9.

In 2023, the economy grew by a weaker than expected 5.5%.

The IMF said that growth in the overall Asia-Pacific region will remain resilient.

“The region remains inherently dynamic and will contribute about 60% of global growth this year, but it will slow down, growing 4.5% in 2024 after 5% in 2023,” he said.

“Drivers of growth are as diverse as the region, ranging from resilient domestic consumption in most ASEAN countries, to strong public investment in China, and most notably in India, and to a sharp uptick in tourism in the Pacific island countries.” — Luisa Maria Jacinta C. Jocson