Philippine Peso Strengthens as Tetangco Signals Rate Increase

The Philippine peso strengthened the most in four months after the central bank signaled it’s moving closer to raising borrowing costs and Finance Secretary Cesar Purisima said the currency was “undervalued.”

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 today. The monetary authority left the benchmark overnight rate at a record-low 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 0.4 percent to 44.99 per dollar at the close in Manila, according to prices from Tullett Prebon Plc. It touched 44.94 earlier, the strongest level since Jan. 15. The peso climbed 0.7 percent in the past five days, the best weekly performance since September and the first gain this year.

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. Purisima commented on the exchange rate today in a speech he gave in Singapore.

Curb Volatility

“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.”

One-month implied volatility in the peso, a measure of expected moves in the exchange rate used to price options, dropped 20 basis points today to 6.50 percent. The weekly drop of 68 basis points was the biggest in three months.

Consumer prices rose 4.2 percent in January from a year earlier, following a 4.1 percent increase the previous month, data showed this week. 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 the exceeds the 2015 goal of 2 percent to 4 percent, Tetangco said today.

The potential lifting of a court injunction prohibiting higher power prices would boost inflation by 15 basis points in 2014 and 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.

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