By Joann Santiago
MANILA, Sept 10 (PNA) – – Investors’ expectations of a sooner-than-later hike in Federal Reserve’s key rates further weakened the Philippine peso and the local bourse Wednesday.
The local unit shed Php 0.23 and ended the day at 43.94 from the previous day’s 43.71.
BPI lead economist Emilio Neri Jr. told PNA that the peso’s weakness was caused purely by external developments.
”Markets’ expectation that the Fed rate hike would come sooner than expected increased and so markets continue to price this in,” he said.
This development resulted from the release of a study by the San Francisco Fed, which shows that markets expect the current key rates of the Fed to be at record-low of zero to 0.25 percent longer than Fed officials do.
The report, penned by San Francisco economists Jens Christensen and Simon Kwan, showed that market participants expect the Fed to raise key rates only in the third quarter of 2015 and end that year at 0.75 percent. In 2016, markets expect the key rates to end the year at 2.13 percent.
This is different from Fed officials’ outlook that the key rates will rise to one percent in end-2015 and to 2.5 percent in end-2016.
Neri said the release of the report along with last week’s cut in European Central Bank’s (ECB) main rates made the peso fell against the US currency.
He explained that this situation can be cushioned if the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) hiked further on Thursday the central bank’s key rates.
“But if global developments continue to favour the dollar, then a hike in the BSP rates will not be enough,” he said.
Neri expects the MB to hike by 25 basis points both the BSP’s key rates and the interest rate of the central bank’s special deposit account (SDA) facility.
To date, the BSP’s overnight borrowing or reverse repurchase (RRP) rate is at 3.75 percent and the overnight lending or repurchase (RP) rate is at 5.75 percent.
These were hiked by 25 basis points last July to ensure that the government’s two to four percent inflation target for 2015 will be protected.
Relatively, the SDA rate is now at 2.25 percent. This was increased by 25 basis points last June to address the high-liquidity situation in the country.
With these developments the peso started the day at 43.79, weaker than the 43.70 a day ago.
It traded between 43.75 and 43.95 bringing the day’s average at 43.87, down from day-ago’s 43.71.
Volume of trade reached USD 1.2 billion, higher than the USD 1.04 billion Tuesday.
Neri expects that local unit to correct before the week ends but cited that this can happen if the BSP delivered a rate hike.
For Thursday, the peso is expected to trade between 43.85 and 44.10.
Similarly, the Philippine Stock Exchange index (PSEi) was affected by capital flight and declined by 0.56 percent or 40.89 points to 7,212.78 points.
All the sectoral counters followed the main index led by the mining and oil that fell 1.56 percent or 281.79 points to 17,724.84 points.
Trading volume remain high at 1.52 billion amounting to Php 8.95 billion.
Losers led gainers at 105 to 71 while 43 were unchanged. (PNA)