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An economist compares the effect of peso depreciation to the US currency.

The Philippine peso is expected to depreciate much more versus the US dollar as central banks keep raising important interest rates to combat the high inflation rate and roll back pandemic-related policies.

The local currency’s depreciation to 54.999 mid-trade on Friday nearly brought it to the 55-level versus the US dollar.

It dropped to its lowest point since October 27, 2005, when it traded at 55.08, or at the end of the week, at 54.985 against the US dollar.

In response to inquiries from the Philippine News Agency, Michael Ricafort, chief economist at Rizal Commercial Banking Corporation (RCBC), stated that “the peso exchange rate would now be somewhat a function of the predicted hike in local policy rates in the coming months.”

The Monetary Board (MB), which sets Bangko Sentral ng Pilipinas’ (BSP) policy, raised the key interest rates by a total of 50 basis points between May 19 and June 23, 25 basis points each time.

Both measures were made in an effort to slow the rate of inflation, which has been above the government’s target range of 2-4 percent ever since last April, when it reached 4.9 percent and then 5.4 percent the following month.

To date, inflation has averaged 4.1 percent, and according to monetary authorities, this year inflation will average 5 percent as a result of rising prices for domestically produced goods like fish as well as oil and non-oil commodities worldwide.

After the Fed rates have increased by a total of 150 basis points since last March, economists claimed the BSP must likewise raise its benchmark interest rates in order to keep the interest rate spreads with the US to a minimum.

While the Fed’s main interest rates are currently between 1.5 and 1.75 percent, the BSP’s overnight reverse repurchase (RRP) rate is currently at 2.5 percent.

The peso’s recent decline, according to Ricafort, “more than offsets the lower premium/interest differentials between the Philippines and the US (important BSP overnight borrowing rate).”

Relatively speaking, he claimed that the local currency’s depreciation causes inflation because it lowers the peso’s value against the US dollar, which raises the price of imported goods like oil and other commodities, which have been hitting record highs.

As a result, he explained, “a weaker peso and higher global commodity prices would increase import prices and overall inflation, which could lead to higher prices of other affected goods and services or risk of second-round inflation effects, as also triggered by higher wages and transportation costs.”

Since the beginning of 2022, the local currency has lost 7.8 percent of its value relative to the US dollar.

On the other hand, other industries gain from the weakening of the peso, including those that employ overseas Filipino workers (OFW), who receive a higher peso value for their dollars, the business process outsourcing (BPO) industry, and international travel agencies.

While these industries gain from the peso depreciation, according to Ricafort, “any advantage may be offset by higher prices/inflation already at a new 3.5-year high of 5.4 percent in May 2022 and could still go up towards 6 percent, in view of higher minimum wages of at least +6 percent in NCR (National Capital Region), minimum transport fares effective June 2022, and the higher prices of other affected goods and services, or risk of second round inflation effects, which were warned about in

Accordingly, he declared that “increased local policy rates could contribute to higher borrowing expenses/financing costs of households/individuals, enterprises, and the government, thereby raising debt servicing costs notably for the latter that could lead to higher outstanding debt.”

The conflict between Russia and Ukraine is one of the main factors driving the rise in global commodity prices, and Ricafort said that any resolution of this matter, which is currently speculative, as well as an easing of recent lockdowns in China and other nations following an increase in coronavirus disease 2019 (Covid-19) infections, “would be important inflection points that would help significantly ease elevated inflation and somewhat help reduce the aggressiveness of the Fed.”

He asserted that this flexibility “would, in turn, facilitate the recovery in the global financial markets, particularly the bond and stock markets that witnessed considerable sell-off in recent weeks/months.”

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