Peso weakness not likely to affect inflation – BSP

MANILA, Philippines – The peso’s current weakness is not likely to significantly impact on inflation, a Bangko Sentral ng Pilipinas official said.

This is foreseen as the pass-through rate of the foreign exchange movement to inflation has declined over the years and the country’s macroeconomic fundamentals remain sound, BSP Deputy Governor Diwa C. Guinigundo said.

“The exchange rate pass-through has declined over the years. I think right now, for every one percent depreciation, the impact is about 0.06 percent (on inflation),” Guinigundo said.

Thus, inflation has remained benign despite the weakening of the peso since May, when the US Federal Reserve announced a possible scaling back of its bond-buying program. The Fed’s impending tapering is putting an upward pressure on the greenback as investors scramble to put back funds in the improving US economy.

The peso weakend to an almost three-year low last Thursday when it closed at 44.75 to a dollar. The local currency was dragged down by investors second-guessing the timing of the Fed’s tapering and by geopolitical risks in Syria.

Apart from the declining pass-through rate of the peso’s depreciation to inflation, Guinigundo pointed out that sound macroeconomic fundamentals should temper any upside risks to the rise in consumer prices.

“The fact that we have appropriate level of monetary aggregates in the economy, that supply conditions have been broadly favorable, and the economy continues to grow – these are more than enough to upset potential inflationary pressures that a relatively weak peso might imply,” Guinigundo stressed.

“While the peso has a weakening bias, this is more temporary than permanent. If you look at the fundamentals that is driving the exchange rate, they all point out to the north rather than to the south.”

The peso finished at 44.605 per dollar on Friday, partly recovering after the country’s Asia-leading 7.5-percent second-quarter economic growth was announced.

Guinigundo noted that the peso has averaged 41.50 to a dollar since the start of the year, well-within the full-year assumption of 41 to 43.

Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, said the peso’s movement against the dollar this year will be partly reliant on the Syria conflict as the Middle East serves as a second home to a big number of overseas Filipino workers.

“The new factor that becomes part of the equation of the exchange rate and the inflation is the Syrian conflict,” he said.

“The Middle East is the second biggest contributor of remittances to the Philippines so when something happens there, we’re affected,” he continued.

Neri stressed that the local markets will be watching how the Syrian conflict unfolds as sentiment may turn unfavorable despite the country’s sound macroeconomic fundamentals.

“Even if fundamentals remain intact, if there’s uncertainty about our dollars coming from the Middle East… then we’re going to have this kind of volatility in the market,” Neri said. –Kathleen A. Martin (The Philippine Star)