The peso recovered a substantial 68 centavos yesterday, closing at 42.72 from a near 20-month low of 43.40 to the dollar on Thursday, prompting the Bangko Sentral ng Pilipinas (BSP) to forego a plan to raise its key interest rates by another half a percentage point.
"Notwithstanding the volatility in the foreign exchange market, we decided to adopt a neutral policy stance for the time being. We are convinced that the recent movement in the exchange rate is largely sentiment-driven," BSP Gov. Rafael B. Buenaventura said yesterday.
The BSP key overnight rates stand at 10 percent for borrowing and 12.25 percent for lending. The BSP has brought it up by a total of 100 basis points, or a full percentage point, to match the US rate hikes.
"The volatility of the exchange rate was temporary and the foreign exchange market will soon stabilize with the expected start of peace negotiations between the government and the rebel group in Mindanao next week," Buenaventura said.
For the past few weeks, speculations pummeled the peso as investors switched to dollars due to security and political concerns as well as fears of more interest rate hikes in the US.
Traders, however, said investors started unloading their dollar holdings yesterday after it was clear that the peso's depreciation to 43.40 to the dollar was "overdone."
They said some investors were able to make profits, particularly those who bought the dollar at 41, but others incurred losses, particularly those who bought it at 43.
At the Philippine Dealing System (PDS), the peso traded at a high of 42.720 and a low of 43.150 to the dollar. Its weighted average rate stood at 42.976 or 18.30 centavos higher from Thursday's average of 43.159 to the dollar. Volume of transactions was down to $170.7 million from a high of $206.7 million the other day.
A trader from a foreign bank said it was mostly the local banks which were sustaining the strength of the peso. "Most probably local banks expect some remittances from overseas workers with the opening of classes next month," he explained.
Traders expect the peso to strengthen to 42.50 to the dollar next week.
Finance Secretary Jose T. Pardo said fiscal managers were against another hike in overnight rates since most banks have been placing their money with the BSP and were no longer lending to the private sector.
"I met with the President yesterday and his marching order is that for us to make sure that the economic recovery will continue," Pardo said, warning that "another rate hike will pull down the economy."
Bankers Association of the Philippines (BAP) president Placido Mapa agreed with Pardo saying that banks will no longer be able to keep lending rates at present levels if the BSP would effect another rate hike. "There would be some increases particularly in the rates slapped to prime borrowers like multinational companies," he said. -