Philippines peso slides to 20-day low as trade gap stays near record low, BSP hikes inflation forecasts

The trade gap was $2.564 bln in December, near November's 10-month low of $2.566 bln and January's all-time low of $2.638 bln

Manila port
Manila port Reuters

The Philippines peso fell to a near three-week low on Friday (Feb 10) as data showed that the trade deficit stayed near January's record low while the central bank's upward revision of inflation outlook continued to weigh.

In December, Philippines recorded a trade deficit of $2.564 billion, slightly better than the November gap of $2.566 billion which was a 10-month low, and close to the all-time low of $2.638 billion, as per data releassed on Friday.

On Thursday, the central bank of Philippines had revised its 2017 inflation outlook to 3.5% from 3.3%, and to 3.1% from 3% for 2018, but it kept policy rates unchanged.

Some analysts have forecast a hike in interest rates later this year given the accelerating inflation.

At 10:00 AM Singapore time, a US dollar fetched 49.96 peso, up from Thursday's close of 49.94. The USD/PHP had risen to as high as 50.05 earlier in the day, its highest since 20 Jan.

Rising Inflation

The Monetary Board held the interest rate on the central bank's overnight reverse repurchase facility at 3.0% at Thursday's review despite having increased inflation expectations.

Possible adjustments in electricity rates as well as the initial impact of the government's broad fiscal reform program are the two main factors keeping risks to inflation on the higher side, the policy-setting Monetary Board noted.

Uncertainties surrounding global growth prospects continue to be a key downside risk to the inflation outlook, according to BSP.

The latest forecasts continue to indicate that the inflation path will remain within the target range of 3%± 1 percentage point for 2017 and 2018.

Analysts' expectations

The ANZ Research said it expects the BSP to raise its interest rate corridor by the third quarter of 2016 as the inflation rate accelerates.

"In our view, this is indicative of the rising bias of the central bank to upwardly adjust its interest rates in the medium-term. Hence, we maintain our expectations of interest rate hikes by Q3," said ANZ Research economist Eugenia Victorino.

"We expect inflation to remain on an upward trend initially, pushed by annual gains in commodity-related items over the first half of the year. Meanwhile robust domestic demand, coupled with the government's push for infrastructure spending, will likely push inflation higher throughout 2017."

But for some, the BSP is unlikely to alter the policy rates given that growth is robust and inflation is staying within the central bank's target range.

The London-based research consultancy Capital Economics said the policy rate will remain unchanged at 3% through 2017.

"Although the headline inflation rate has been drifting higher in recent months, at 2.7% year-on-year in January, it remains comfortably within the BSP's 2% to 4% target range."