Philippine central bank delivers big rate hike

MANILA: The Philippine central bank on Thursday delivered another large interest-rate increase and signalled it has space to raise borrowing costs further to tackle broadening price pressures.

Bangko Sentral ng Pilipinas raised the overnight reverse repurchase rate by 50 basis points to 3.75%. That took the total increases this year to 175 basis points to rein in inflation that has drifted above the BSP’s target of 2-4% for four out of the past seven months.

“The inflation target remains at risk,” Governor Felipe Medalla said in a livestreamed briefing. “Elevated inflation expectations likewise highlight the risk of further second-round effects.”

The central bank raised its inflation forecast for the year to 5.4% from 5% previously, while lowering the 2023 prediction to 4% from 4.2% and the 2024 forecast to 3.2% from 3.3%.

The Bank of Thailand last week raised its key rate for the first time in nearly four years, by 25 basis points to 0.75%, to curb inflation that is hovering around 7%, and signalled further gradual hikes.

Medalla said any further policy moves in the Philippines would remain dependent on data, as well as actions by the US Federal Reserve. That signals that the BSP isn’t done with rate hikes yet, given that Fed officials have said they are far from finished controlling inflation — a line echoed by peers in the UK, Australia, South Korea and India. 

The latest move by the BSP reinforced its commitment to anchoring inflation expectations. It still has a lot of work to do, said Tamara Mast Henderson, Asean economist with Bloomberg Economics.

Domestic consumer prices rose 6.4% in July, the fastest since late 2018, while the peso is among the worst performers in Asia this month. Accelerating price gains are weighing on consumption, which was evident from a slower-than-expected economic expansion in the quarter through June.

Still, Medalla said favourable growth conditions “gives the BSP the flexibility to act against inflation pressures,” and that price growth will probably peak in October or November. 

Against a backdrop of rising prices, “BSP can carry out 25 basis point increases at each of the remaining policy meetings” this year, said Nicholas Mapa, economist at ING. Inflation will likely peak in October, he added.

The peso was little changed after the decision, and closed at 55.89 per dollar.