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Philippine Peso Declines as Central Bank Signals Rate Reduction

The Philippine peso slid to this month’s lowest level after central bank Governor Amando Tetangco suggested policy makers may cut interest rates tomorrow, reducing the yield advantage of the currency.

Eleven of the 15 analysts in a Bloomberg News survey forecast the Philippines will hold rates at 4 percent, while four predict a reduction, more than for the June meeting. The peso has risen 2.6 percent in the past six months, the best performance among emerging markets, according to data compiled by Bloomberg.

“The central bank has actually hinted it may cut interest rates,” said Leong Sook Mei, Singapore-based regional head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. “That will be negative for the peso. The run-up on the peso was too big.”

The peso dropped 0.3 percent to 42.185 per dollar in Manila, according to Tullett Prebon Plc. The currency touched 42.232 today, the weakest level since June 29. One-month implied volatility, a measure of exchange-rate swings used to price options, climbed 50 basis points, or 0.50 percentage point, to 6.5 percent. It was the biggest jump since June 14.

“Our current view is that there is some scope to adjust monetary policy settings to protect the inflation target on the downside,” Tetangco said yesterday.

Ten-year government peso notes yielded 376 basis points more than similar-maturity U.S. Treasuries, down from this year’s high of 456 basis points on June 1, according to data compiled by Bloomberg.

The Philippine central bank cut the rate it pays lenders for overnight deposits twice this year, by a combined 0.5 percentage point to 4 percent, before leaving it unchanged in April and June. Consumer prices rose 2.8 percent in June from a year earlier, the slowest pace in three months.

The yield on the government’s 5.875 percent bonds due March 2032 fell six basis points to 5.58 percent, the lowest level since the notes were issued in February, according to prices from Tradition Financial Services.

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