Philippine Peso Climbs to Three-Week High on Higher Rate Signal

The Philippine peso climbed to a three-week high after the central bank signaled it’s closer to raising borrowing costs amid the fastest inflation in two years.

Bangko Sentral ng Pilipinas’ policy stance is “more cautious” and the scope to keep interest rates on hold has narrowed from last year, Governor Amando Tetangco told Bloomberg Television’s Angie Lau today. The monetary authority left the benchmark overnight rate at a record low of 3.5 percent yesterday, even after a report a day earlier showed consumer prices rose in January by the most since December 2011.

“BSP is preparing the market for higher interest rates, which may come sooner rather than later,” said Rafael Algarra, executive vice president and head of financial markets at Security Bank Corp. in Manila. “The BSP is relatively successful in managing volatility and has kept the peso within a tight range.”

The currency advanced 0.2 percent to 45.090 per dollar as of 11:46 a.m. in Manila, according to prices from Tullett Prebon Plc. It touched 45.055 earlier, the strongest level since Jan. 17. The peso climbed 0.5 percent for its best weekly performance since October, halting a five-week loss.

Bangko Sentral is closely monitoring the currency market as excessive volatility can lead to imbalances, boost import costs and cause second-round inflation effects, Tetangco said. The peso slumped to 45.475 per dollar on Feb. 4, the lowest level since August 2010.

“As is our policy, we will let the market broadly determine the exchange rate, but we will, at the same time, maintain a presence in the market to limit excesses in exchange-rate movements,” Tetangco told Bloomberg TV. “We also want to make sure that market conduct is within reasonable bounds.”

Bonds Fall

One-month implied volatility in the peso, a measure of expected moves in the exchange rate used to price options, dropped six basis points to 6.64 percent and fell 54 basis points for the week, the biggest decline since November.

Consumer prices rose 4.2 percent in January from a year earlier, quickening from 4.1 percent the previous month, data showed on Feb. 4. The central bank has kept interest rates on hold since October 2012, when it cut borrowing costs.

The inflation outlook for 2014 and 2015 is above the mid-point of the 3 percent to 5 percent target for this year and 2 percent to 4 percent for 2015, Tetangco said today.

The potential lifting of a court injunction prohibiting higher power prices would boost 2014 inflation by 15 basis points and by seven basis points next year, Deputy Governor Diwa Guinigundo told reporters at a briefing in Manila yesterday.

“We kept interest rates steady given manageable inflation but the balance of risks to this outlook has continued to be tilted to the upside,” he said.

The yield on the 8 percent government bonds due July 2031 rose seven basis points, or 0.07 percentage point, to 5.06 percent, the highest since Jan. 6, according to prices from Tradition Financial Services.

To contact the reporter on this story: Clarissa Batino in Manila at cbatino@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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