Peso dollar rate
Image Credit: BSP | Gulf News

Manila: Ahead of a central bank policy rate-decision meeting this week, the Philippine peso has hit a new multi-year low at Php54.010 vs US$1 (at 9am UTC) on Monday, from Php53.69 on Friday (June 17).

Central bank data showed the peso slipped to Php53.50 (buying rate) vs the US dollar; it was selling dollars for Php54.00 on Monday. The UAE dirham stood at Php14.52 on Monday.

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The Asian currency dropped to its lowest level in over three-and-a-half-years.

The peso led losses Monday with its 0.5% drop that dragged the currency to its lowest since October 2018.

Other Asian currencies traded mixed amid recession fears.

Bangko Sentral ng Pilipinas (BSP), the country’s central monetary authority, is expected to decide on possible rate hikes this year to curb higher inflation, following a recent US Federal Reserve decision, that has led to a chorus of rate-raising decisions from most central banks.

Felipe Medalla, the incoming BSP governor, is on record calling for at least two rate hikes this year.

He also left the possibility for additional policy rate increases on the back of high inflation and higher-than-expected balance of payments (BOP) deficit.

“Floating” rates to rise

Higher interest rates means higher borrowing charges for businesses as well as auto and housing loans. Mortgages based on “floating” rates may also rise.

The Philippines’ central monetary authority is set to make a policy decision on rates this Wednesday. The meeting is currently the focus of market analysts who are closely watching the country's current account balance, which is expected to see wider deficits in 2022 and 2023 than the original forecast.

Depending on the rate hike, the peso may still be see more weakness due to bigger impact of higher price of oil, of which the Philippines is import dependent, say analysts.

Meanwhile, the growing trade deficit is going to continue putting downward pressure on the currency.

Recession fears: What higher BOP deficit means

The peso has dropped nearly 11% over the last 12 months against the US dollar.

Amid the peso’s decline and external risks, the Philippine central bank said Friday it expects the country's current account balance (balance of payments, BOP) to post deficits in 2022 and 2023 than previously projected.

A BOP deficit means the country imports more goods, services, and capital than it exports.

By implication, it must borrow from other countries to pay (in US dollars) for its imports, thus raising demand for the US currency.

For 2023, the current account deficit is expected to reach $20.5 billion, or 4.4 per cent of GDP, wider than the previous projection of $17.1 billion, or 3.7 per cent of GDP.

Philippine lending rates

The Overnight Lending Facility (OLF) rate stood at 2.75% on Monday (June 20), 0.25% high than year-ago levels, BSP data show.

Overnight Deposit Facility, meanwhile, was up 0.25% today at 1.75% than year-ago levels (1.50%).

On Friday, the Philippine Dealing system, the country’s central clearing house recorded $962.5 million in foreign exchange transactions, from $1.141 billion the previous.