Peso depreciation on a temporary adjustment mode

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Peso depreciation
The depreciation of peso is only temporary and is expected to have minimal imapct on the inflation and macro-economy in the medium term.

The depreciation of peso is only temporary and is expected to have minimal impact on the inflation and macro-economy in the medium term.

According to Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo, the local currency has buffers which make the peso competitive and able to deal with the negative market sentiments. These buffers come from portfolio and investments, and other foreign exchange sources like remittances, exports and BPO receipts.

Higher imports and more demand for US dollar by corporate affects the current peso on the local front. At the end of the day, the broad stability and the country’s inherently strong fundamentals will support peso stability in the medium term, and that the depreciated value is just a reflection of underlying market conditions like normalization of US interest rates, tightening of other market rates and the preference for US dollar asset portfolio.

Also, the exchange rate pass-through has dropped or declined over time due to the volatile exchange rate movements have a decreased effect on inflation.

Based on central bank data, the pso depreciation will only impact on inflation rate which means it will rise if it loses P1 to the US dollar. This will affect the inflation by 0.15 to 0.20 percentage point over a two-year scenario.

The weaker peso is only a temporary adjustment phase following its historical real effective exchange rate which would show that it has been on an appreciating trend on the back of structural current account surplus.

The peso has lost almost two percent since January’s average of P49.73 versus the P50.43 average as of Friday. The peso closed at P50.68:$1 on BSP data.

Also, last Friday, the peso dropped to an 11-year low of P51.08 to the US dollar before closing at P50.98 based on the Philippine Dealing System.

Meanwhile, BSP Governor Nestor A. Espenilla Jr. assured the market last week that they are constantly watching the exchange rate market for any excessive short-term volatility that are not consistent with underlying economic conditions.

Source: Manila Bulletin