THE PESO may strengthen versus the dollar this week on market expectations of a continued low interest rate environment following the above-target headline inflation print logged last month.

The local unit closed at P48.07 per dollar on Friday, inching up from its P48.08 finish on Thursday, data from the Bankers Association of the Philippines showed. The peso also closed at P48.08 per dollar a week ago.

The peso closed slightly stronger on Friday following the higher-than-expected January inflation print, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

The consumer price index rose 4.2% last month, quicker than the 3.5% in December and the 2.9% in January 2020, the Philippine Statistics Authority reported on Friday.

The January print was also beyond the 2-4% annual target of the Bangko Sentral ng Pilipinas (BSP) and was the highest reading since the 4.4% print logged in January 2019.

Inflation spiked due to higher food and transport prices, based on data from the Philippine Statistics Authority.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the latest balance of payments data also supported the peso’s strength last week.

The country’s BoP stood at a record $16.022-billion surplus last year, more than twice the $7.843 billion surfeit seen in 2019, backed mostly by inflows from foreign debt as well as the import decline amid the crisis, central bank data released on Feb. 2 showed.

Last year’s surplus was also larger than the $12.8-billion surfeit the BSP expected for 2020, based on projections given in December.

For this week, the market will be monitoring the BSP Monetary Board’s first policy meeting for the year.

The central bank will likely maintain benchmark interest rates when it revisits its policy settings this Thursday, according to 17 out of 18 analysts in a BusinessWorld poll held last week.

Analysts said going further into the negative real interest rate territory may cost more damage than benefits at this point, noting that fiscal policies may be more advantageous to quell soaring inflation.

The overnight reverse repurchase or key policy rate is currently at 2%, well below the 4.2% inflation print in January.

The BSP slashed the rates on its overnight reverse repurchase, lending, and deposit facilities by 200 basis points last year, bringing them to record lows. Central bank officials have said the recent uptick in inflation would have occurred even without last year’s easing moves as the climb was caused by supply side factors like weather disruptions and the pickup in global oil prices.

Meanwhile, Mr. Asuncion said the elevated inflation print in January could push the peso higher against the dollar to make food imports cheaper.

For this week, Mr. Ricafort gave a forecast range of P48.03 to P48.12 versus the dollar while Mr. Asuncion expects a wider trading band of P47.95 to P48.15. — L.W.T. Noble