Peso to further appreciate if BSP key interest rates are adjusted

The peso could further rally to a much stronger level than the projected P35 to the US dollar this year upon the adjustment of key interest rates by the Bangko Sentral ng Pilipinas (BSP), Sen. Ralph G. Recto said yesterday.

Recto said that an upward movement in the interest rates of BSP would usually redound to stronger peso, which could mitigate rising oil and food prices.

"The peso could further strengthen to a level better than the P35 to the US dollar as forecast of a foreign bank," he said referring to the latest peso-dollar projection of Hong Kong and Shanghai Banking Corp. (HSBC).

HSBC forecast a stronger peso this year and next year with a peso-dollar exchange rate of P37.50 to $1 in 2011 and P35.50 in 2012 or better than BSP's own projections of P42 to P45 against the greenback.

The US dollar has been trading between P43.27732 to P43.4065 since the week opened.

Recto said the BSP is widely expected to change its key interest rates to ease the impact of inflation caused by soaring fuel and food prices.

He said once the BSP rates are adjusted, the government could take advantage of the resulting stronger peso and temper the soaring prices or inflation.

Inflation this year is expected to hover in the range of 3-5 percent with 2010 inflation averaging 3.8 percent. Last month's inflation was tracked at 3.5 percent.

The senator, Senate ways and means chair, said a stronger peso could off-set the impact of any drastic movement in the pump prices of fuel and the resulting high inflation rate as the Middle East region braces for more regional unrest in the coming weeks.

On Tuesday, local oil companies jacked up their fuel prices by at least 50 centavos per liter, blaming the fragile petroleum supply situation in the Middle East, which is being rocked by pro-democracy rallies protesting overstaying despotic regimes.

"In layman's terms, when peso is strong, there would fewer pesos needed to import fuel which we pay in dollars and this should trigger similar downtrend in prices of fuel and food," he said. Currently, BSP's overnight borrowing rate - or the interest imposed by banks whenever BSP borrows - is 4 percent while overnight lending - or the interest rate slapped by BSP from its borrowing banks - is at 6 percent.

At the end of each working day, a bank may have a surplus or shortage of funds banks after transferring money to each other, to foreign banks, and to large clients.

Banks that have surplus funds may lend them to or deposit them with BSP, which may earn them a 4-percent overnight interest while banks with cash shortages will have to borrow from the BSP and in return, be slapped an interest rate of 6 percent.

Overnight rates are a measure of cash liquidity or availability of funds prevailing in the economy. Key policy rates of the BSP have been kept unchanged since July 2009 and will have to be revisited March 25 when the Monetary Board, the policy-making body of BSP, meets.