Manulife Urges BSP to Prioritize Inflation Over Peso Defense

Manulife Investments Philippines has urged the Bangko Sentral ng Pilipinas (BSP) to avoid using interest rate hikes as a primary tool to defend the peso against global currency pressures. Instead, the central bank should focus on controlling inflation, according to Jean Olivia de Castro, head of fixed income at Manulife.

De Castro acknowledged that further rate tightening could still be necessary if inflation risks worsen. However, she emphasized that the BSP should differentiate between persistent domestic inflation and short-term peso weakness driven by external factors like elevated US Treasury yields and a strong dollar.

The BSP’s policy interest rate influences borrowing costs, demand, and inflation. While higher rates can support the peso by making peso-denominated assets more attractive, excessive tightening could slow economic activity. De Castro advocated for a disciplined, data-dependent approach to preserve the BSP’s credibility on inflation while minimizing damage to growth.

Global developments, particularly US labor market data, will likely shape the direction of interest rates and currencies. A strong US payroll report could keep US yields high, pressuring Philippine bond yields and the peso. Conversely, a weaker labor report might signal Federal Reserve easing, potentially easing pressure on the peso.

Manulife expects elevated global yields, peso weakness, and increased government borrowing to keep Philippine interest rates relatively high even if short-term volatility decreases.