THE Philippine peso continued to strengthen for the fourth straight day breaking through the P55 to the dollar level since Tuesday, Sept. 17, 2024.
Data from the Bankers Association of the Philippines’ website showed the local currency closed at P55.69 to $1 on Friday, Sept. 20.
According to Steven Yu, past president of the Mandaue Chamber of Commerce and Industry, the strengthening of the Philippine peso, for now, is buoyed by the general weakening of the US dollar after it made a supersize cut in interest rates by 50 basis points last Wednesday, Sept. 18.
“With a bigger interest rate differential, funds are shifting to emerging economies like the Philippines so there is a temporary surge in demand for local currencies. There is also the unwinding of carry trades and other activities that are temporarily weakening the US dollar,” said Yu.
But he said all these are expected to be short-lived because the country needed to cut interest rates too.
“We don’t expect the peso to strengthen further significantly because we need to lower interest rates and it should be sooner than later to help the economy bounce back. Our consumption-driven economy is showing signs of weakness especially last month and this month. We need to restore confidence in the business sector to resume and increase investments, and lowering the cost of money will drive it,” Yu explained.
Retailer Robert Go, in a separate interview, said that
a stronger peso makes imported goods less expensive. This benefits consumers by lowering the cost of imported products like rice, fuel, electronics and other items.
“We are a net importer country so this is better for consumers,” he said.
But while a weaker dollar will tame inflation and increase purchasing power, Yu said it will also hurt the country’s competitiveness in the global market in terms of export of goods and services such as in the business management process and tourism sectors, among others.
Meanwhile, on Friday, the Bangko Sentral ng Pilipinas cut the reserve requirement by 250 basis points for universal and commercial banks and non-bank financial institutions with quasi-banking functions; 200 bps for digital banks; and 100 bps for thrift banks and for rural banks and cooperative banks, effective Oct. 25.
When a bank reduces the reserve requirement, it means that banks are required to hold less money in reserve compared to their total deposits. The reserve requirement is the portion of depositors’ balances that banks must keep on hand, either in their vaults or with the central bank.
The reduction may result in increased lending capacity and lower interest rates but it can also lead to inflation if there’s too much money that flows into the economy. With a lower reserve, banks have less liquidity in case of a sudden need for cash, which could increase the risk of financial instability if many depositors withdraw their money at once.
“Most businessmen feel that this has minimal impact because the banking system is awash with P5 trillion in liquidity. They feel we need to cut interest rates soonest,” said Yu.
The current interest rate now stands at 6.25 percent after a 25 basis point cut in August. / KOC