Philippine Peso Gains to 2008 High as Higher Interest Rates Seen

The Philippine peso climbed to the highest level in almost five years on speculation the central bank will start raising its benchmark interest rate in 2013 to ward off inflation. Five-year government bonds declined.

Overseas investors bought $316 million more of the nation’s stocks than they sold yesterday, exchange data show, as Chinese export numbers topped estimates. The economy is at risk of overheating and “it’s very healthy” for the Philippines for borrowing costs to rise, Michael Spencer, Deutsche Bank AG’s chief economist for Asia, said at a briefing yesterday in Manila. He forecasts a 75 basis point rise in the policy rate this year.

“The rate-cut factor has reached bottom and this will be supportive for the peso,” said Enrico Tanuwidjaja, an economist at Royal Bank of Scotland Group Plc in Singapore, adding that he predicts borrowing costs will be increased in the second half. “As risk appetite returns, the Philippines is set to lead the pack in Southeast Asia on investor interest.”

The peso rose 0.2 percent to 40.605 per dollar at the close in Manila, prices from Tullett Prebon Plc showed. It touched 40.567 earlier, the strongest level since March 10, 2008. The currency strengthened 0.7 percent from Jan. 4, a fourth week of gains. One-month implied volatility, a measure of expected moves in exchange rates used to price options, was unchanged at 4.1 percent.

The central bank is “looking at tools” to manage inflows, Governor Amando Tetangco said today in Manila, adding that there were no specific measures at the moment. The monetary authority imposed limits on currency forward positions at banks last month.

Bangko Sentral ng Pilipinas cut its policy rate four times last year to a record low of 3.5 percent. The next policy meeting will be on Jan. 24. Tanuwidjaja predicted the central bank will raise its overnight borrowing rate by 25 basis points each in the third and fourth quarters. The peso will probably strengthen to 39.30 by the end of 2013, he said.

The yield on the 5 percent notes due August 2018 rose six basis points, or 0.06 percentage point, to 4.05 percent, according to Tradition Financial Services.