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Peso down vs dollar on bets for US Fed holding key rate

THE PESO depreciated against the dollar on Monday on expectations that the US Federal Reserve will hold its key rate at its meeting this week.

The local currency closed at P56.866 versus the dollar on Monday, weakening by 5.1 centavos from Friday’s P56.815 finish, data from the Bankers Association of the Philippines’ website showed.

The local unit opened Monday’s session at P56.80 per dollar. Its intraday best was at P56.74, while its weakest showing was at P56.875 against the greenback.

Dollars traded fell to $821.1 million on Monday from the $1.06 billion on Friday.

The peso weakened due to expectations that the Fed will keep its benchmark rate steady in its meeting this week, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The peso weakened further amid expectations of hawkish policy cues from the US Federal Reserve in their meeting this week,” a trader likewise said in an e-mail.

A Reuters poll of 97 economists conducted on Sept. 7-12 showed 95%, or 94 economists, predicted the US central bank would hold the federal funds rate at the current 5.25%-5.5% during its Sept. 19-20 meeting.

The Fed raised interest rates by 25 basis points (bps) last month, bringing its benchmark overnight rate to a range between 5.25% and 5.5%.

It has hiked rates by a cumulative 525 bps since it began its tightening cycle in March last year.

The peso was also dragged down by higher global crude oil prices on Monday, Mr. Ricafort added.

Reuters reported Brent crude futures rose 71 cents or 0.8% to $94.64 a barrel by 0622 GMT while US West Texas Intermediate crude futures were at $91.55 a barrel, up 78 cents or 0.9%.

Both benchmarks have climbed for three consecutive weeks to touch their highest levels since November and are on track for their biggest quarterly increase since Russia’s invasion of Ukraine in the first quarter of 2022.

For Tuesday, the trader said the peso could recover due to a potentially stronger euro zone inflation report.

The trader sees the peso moving between P56.70 and P56.90 per dollar on Tuesday, while Mr. Ricafort expects it to range from P56.75 to P56.95. — Aaron Michael C. Sy

#Peso #dollar #bets #Fed #holding #key #rate

Remolona sees no need for rate hike if there are no new supply shocks

Remolona sees no need for rate hike if there are no new supply shocks

By Keisha B. Ta-asan,  Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) does not see the need to resume monetary tightening if there are no more supply shocks such as those that fueled the uptick in August inflation.

BSP Governor Eli M. Remolona, Jr. told reporters on Thursday that the acceleration in August inflation was caused by supply shocks in food and fuel, which dissipate “fairly quickly.”

“If that’s all there is, if there are no further supply shocks beyond that uptick in August, then it won’t be necessary to hike the policy rate,” he said in a press briefing during the Alliance for Financial Inclusion (AFI) Global Policy Forum. “It won’t justify an easing, (but) it won’t be necessary to raise the policy rate.”

The BSP has kept its key policy rate at a near 16-year high of 6.25% for the last three meetings. It has hiked borrowing costs by 425 basis points (bps) from May 2022 to March 2023.

Headline inflation quickened for the first time in seven months in August, hitting an annual 5.3%. It marked the 17th consecutive month that inflation surpassed the BSP’s 2-4% target range. Inflation averaged 6.6% in the eight-month period.

“I think we should hit the (2-4%) target range by October if there are no further supply shocks. But hitting the target range is not enough. We want to be comfortably within the target range for the year,” Mr. Remolona said.

The BSP projects inflation to hit 5.6% in 2023, before easing within the target to 3.3% in 2024 and 3.5% in 2025.   

Makoto Tsuchiya, assistant economist from Oxford Economics Japan, said the Philippine central bank is expected to maintain its pause despite the quicker inflation in August.

“The central bank is likely to see through the transitory rise in prices. Inflation is still too high to pivot to easing, but the weakening growth picture means a hike is also undesirable,” he said.

Mr. Tsuchiya said inflation could settle within the 2-4% target range by the end of the year, bringing the full-year average to 5.8%. This will allow the Monetary Board to start cutting rates in the first quarter of 2024, he added.

Security Bank Corp. Chief Economist Robert Dan J. Roces in a note said the central bank will consider inflation, economic growth, and other external factors at next week’s policy-setting meeting.

“The recent uptick in the August inflation alone is unlikely to prompt the BSP to resume tightening, recognizing the supply-side nature of the uptick and the fact that there would only be so much that monetary policy can do in such a situation, which requires fiscal complement,” he said.   

Mr. Roces said the BSP will likely keep interest rates unchanged on Sept. 21.   

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, also expects the BSP to keep rates untouched at its next meeting.

“We believe the hurdle for additional rate hikes will be quite high given the glaring slowdown in growth momentum. BSP admits that tightening efforts have yet to be fully felt with the lagged impact still feeding through to bank lending,” Mr. Mapa said.   

The Philippine economy expanded by 4.3% in the second quarter, the slowest in two years. This was slower than the 6.4% growth in the first quarter and 7.5% in the same period last year. For the first half, economic growth averaged 5.3%, lower than the government’s 6-7% target. 

Mr. Mapa noted recent price shocks to inflation are supply side in nature and is best dealt with non-monetary measures.   

“BSP will only hike should inflation expectations become disanchored or to steady the currency,” he said, adding that the Philippine central bank will likely consider the policy decision of the US Federal Reserve.   

The Federal Open Market Committee is scheduled to meet on Sept. 19 and 20.

The Monetary Board will be having its sixth policy review of the year on Sept. 21.

Mr. Remolona told reporters that the new Monetary Board members will be participating in next week’s meeting.

National Treasurer Rosalia V. de Leon and former Finance undersecretary Romeo L. Bernardo were recently appointed as the new members of the policy-making body of the BSP.

#Remolona #sees #rate #hike #supply #shocks

Variable rate format for RRP may shorten monetary policy lag

THE SHIFT to a variable rate auction format for the reverse repurchase (RRP) facility of the Bangko Sentral ng Pilipinas (BSP) may help shorten the lag whenever the central bank adjusts borrowing costs, an official said.   

BSP Deputy Governor Francisco G. Dakila, Jr. on Wednesday said the implementation of the Overnight (ON) RRP Rate and the shift to a variable rate auction format were largely operational and will not affect the BSP’s monetary policy stance.   

However, the reforms will boost the efficiency of the central bank’s market operations and enhance the implementation of monetary policy, he said.

“Hopefully, (the changes) will shorten (the response lag),” Mr. Dakila said in mixed English and Filipino, adding that the reforms may also help banks in pricing their products for consumers and other lenders.   

“If, for example, there will be a change in the BSP’s monetary policy and the BSP raised its policy rate, the move will have a larger effect in market interest rates because of the daily operations,” he said.   

Starting Friday (Sept. 8), the BSP will shift to a variable rate format for the RRP and introduce the ON RRP Rate, which is a market-determined short-term interest rate.

The BSP also changed the term for its key policy rate, currently at 6.25%, to “Target RRP Rate.”   

According to Mr. Dakila, the Target RRP Rate will be set by the Monetary Board in every policy review, but the ON RRP Rate will change every day based on the daily auction results.

“The ON RRP Rate can be based on the Target, or even higher than the Target. But our objective is for the ON RRP Rate to be close to the Target,” he said.   

Mr. Dakila said that the RRP in auction format, together with the BSP’s term deposit facility (TDF) and the BSP securities facility, or the BSP bills, will help the central bank gauge where markets are and how far they are to the policy rate.   

The Monetary Board hiked borrowing costs by 425 basis points (bps) to bring the key rate to 6.25% from May 2022 to March 2023. 

The response lag, also known as impact lag, is the time it takes for monetary policy to affect the economy once they have been implemented.

Mr. Dakila also said the influence of the BSP on market operations has been limited for a long time, since the RRP facility had a previous ceiling of P305 billion which is the amount that the central bank can hold in terms of volume of government securities.

“For a long time, the volume (for the RRP facility) is only fixed. Our influence on the market is limited. If we want to mop up liquidity, there is only a fixed amount. What we did was to introduce other instruments such as the TDF and the BSP bills, but the ON RRP rate will be adjusted daily,” he said.

However, since mid-July, the BSP started to accept all offers for the RRP facility, and the volume has been raised from P305 billion to more than P500 billion.

Lara Romina E. Ganapin, director of the BSP’s Department of Economic Research, said the central bank shifted to a variable rate auction format due to “available collateral” which it did not have previously.

“Because of some operations that we did during the pandemic, we were able to have enough collateral to pursue these reforms for the RRP facility,” Ms. Ganapin said.   

BSP Senior Assistant Governor Illuminada T. Sicat noted that even if the pandemic had not happened, the BSP is authorized by the BSP Charter to purchase and sell government securities. — Keisha B. Ta-asan

#Variable #rate #format #RRP #shorten #monetary #policy #lag

BSP shifts to variable rate repo auction

BSP shifts to variable rate repo auction

THE BANGKO Sentral ng Pilipinas (BSP) will shift to a variable rate format in the auction for the overnight reverse repurchase (RRP) facility starting Friday (Sept. 8), as well as introduce a formal operational target called the “Overnight (ON) RRP Rate.”

Similar to the existing BSP securities facility or the BSP bill auction, the variable rate format for the RRP will have a pre-determined offer volume.

BSP Governor Eli M. Remolona, Jr. in a statement on Monday said  an operational target is a market-determined, short-term interest rate that a central bank can “guide” on a daily basis to reflect the current monetary policy stance.

“For the BSP, the shift to variable rate RRP auction format will yield a market-determined rate for overnight funds, the ON RRP Rate, that conveys the results of the daily RRP auctions,” he said.

The BSP chief noted that the ON RRP Rate is an appropriate operational target due to the regularity of RRP auctions and market players’ familiarity with the instrument.   

Earlier in June, the BSP created the overnight rate as the benchmark for determining short-term interest rates amid the phaseout of the London Interbank Offered Rate (LIBOR).

Meanwhile, Mr. Remolona said that in the shift to a variable rate auction format, the BSP’s monetary policy rate would now be called the “Target RRP Rate.”

He said the BSP would signal its monetary policy stance through the Target RRP Rate. The rate will also be set after each policy review of the Monetary Board, similar to the central bank’s prevailing practices.

The RRP facility will also remain as the BSP’s primary monetary policy instrument, Mr. Remolona said.

“The ON RRP Rate is expected to move closely around the Target RRP Rate. Deviations of the ON RRP Rate from the Target RRP Rate will reflect changes in liquidity conditions from time to time, or when deviations from the liquidity forecasts occur,” he said.

Still, the ON RRP Rate should revert and move in accordance with the policy rate over time, as the RRP auction size is adjusted based on observed demand, he said.

“As the market familiarizes itself with the operational target, the ON RRP Rate will carry useful information on liquidity conditions and how they relate to the prevailing stance of monetary policy,” Mr. Remolona said.

“Thus, the introduction of an explicit operational target will provide monetary authorities an important market-based indicator that can help in assessing the effective stance of monetary policy,” he said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP would now set the Target RRP Rate based on their preferred stance. It will then report a prevailing daily rate that reflects liquidity conditions and demand.

“If the ON RRP Rate is lower than the Target RRP Rate, the BSP may look to increase auction volumes to drain more liquidity that leads to tighter financial market conditions, which would cause rates to rise,” he said. 

“But if the ON RRP Rate is higher than the Target RRP Rate, the BSP may look to downsize auction volumes to allow liquidity buildup, which in turn will push rates closer to the Target RRP.”

The BSP also noted that the changes in the RRP facility are part of the central bank’s set of planned reforms during the adoption of the interest rate corridor (IRC) framework in 2016. 

These changes are largely operational and do not constitute any shift in the BSP’s monetary policy stance, Mr. Remolona said. It will also enhance the transmission of monetary policy.

“The shift to the variable rate auction format will also help strengthen the price discovery process by providing market participants and monetary authorities alike a market-determined interest rate that conveys the prevailing cost of and demand for overnight funds in the financial system,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the changes are part of the development of a credible, market-determined funding rate that will be determined by market forces daily.

“The yield curve (should be) more realistic and credible for market players, instead of being distorted and artificially priced, thereby making the IRC system implemented since 2016 more dynamic and effective,” he said. 

This may also lead to a more effective and transparent transmission of monetary policy rates coursed through banks and financial markets. — Keisha B. Ta-asan

#BSP #shifts #variable #rate #repo #auction