Testing the new governor?

PHILIPPINES - In Brief 23 Jun 2022 by Romeo Bernardo

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We had barely made an end-year P55/$ call late last week[1] when the exchange rate shot past P54/$ early this week and closed at P54.7/$ in today's trading. From where we sit, it looks like the selldown of the peso is the market’s way of welcoming the incoming BSP governor, Felipe Medalla, after the airing of his interview with the country’s leading business daily.[2] (As a side note, a similar event happened in 2017 when then governor, Nestor Espenilla, took over.[3]) In the course of the interview, the incoming governor was asked about his exchange rate “comfort level” given market talk that the peso is headed for P55/$. He responded by stressing first that the aggressive US monetary tightening reflects a US-specific problem that does not require the Philippines to match lockstep and that the BSP looks at the influence of not just the US dollar but a basket of currencies, which have offsetting effects on domestic inflation. (See chart) Today, the Monetary Board ignored the market’s tantrum and followed through on the incoming governor’s guidance, increasing the set of policy rates by only 25bp. This brings the key overnight rate to 2.5% with at least another 25bp rate increase likely in August. The BSP increased its baseline inflation forecasts to 5% in 2022 (from 4.6% previous) and 4.2% in 2023 (from 3.9%) but expecting the headline rate to fall to 3.3% by 2024, within the BSP’s 2-4% target. We expect traders to continue to test the BSP’s resolve to keep to a gradual tightening cycle which may see some overshooting of the exchange rate. Although the BSP, with its $104 billion reserves and other off-budget instruments, has the means to combat speculative activity to ...