The peso closed a bit lower on Wednesday, after rising for four straight days, but that offers little comfort for the Philippines’ monetary board when it meets on Thursday to decide policy rates amid slowing economic growth and a recent uptick in inflation.
While closing little changed at 41.575 per US dollar compared to 41.570 Tuesday, the Philippine peso hit a fresh four-year high of 41.445, according to Bloomberg, underscoring the helplessness of central bank in stemming the appreciation of the local currency. It is up 5.5 per cent since the beginning of the year in spite of slowing exports and remittances from Filipinos working abroad.
In July, the board banned foreign funds from making placements in the central bank’s special deposit accounts, a mechanism to mop up liquidity, and cut rates by 3.125 basis points.
The twin measures were expected to curb the peso’s volatile rise by discouraging speculative foreign funds that flow in and out of domestic financial markets. Net inflows of foreign money reached $962.8m in July after a net outflow of $7.7m in June, when worries about the eurozone were high.
Since the board banned foreign fund placements in special deposits accounts and cut the yields on SDAs, the peso has climbed more than one per cent. That is hardly surprising. Money placed with the central bank continued to rise from 1.57tn pesos as of end-June to 1.76tn pesos towards the end of July, according to the central bank.
Global Source Partners, a New York-based economics consultancy, estimates SDA placements could have reached 1.8tn pesos. “The narrowing interest differential and recent ban on foreign fund placements in SDAs (special deposit accounts) failed to make a dent on the money parked in the central bank facility (still high at P1.8tn),” said analysts Romeo Bernardo and Margarita Gonzales in a recent research note.
After cutting policy rates for a third time this year in July, most analysts predict the monetary board to keep rates when it meets on Thursday (September 13), especially after consumer price inflation accelerated to 3.8 per cent in August, the highest in seven months, and to tighten a bit after next year’s May 2013 mid-term elections. But the peso’s rapid rise could upset expectations.
“With an acceleration of prices, monetary authorities will likely refrain from further easing this year, though the same motivation for a policy cut remains (ie to prevent excessive appreciation),” said Global Source.
article source: http://blogs.ft.com/beyond-brics/2012/09/12/philippine-pesos-awkward-rise/
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