central bank of the Philippines BSP
The Central Bank of the Philippines BSP Image Credit: File

Manila: A move by the Philippine central bank to raise the policy rate on Thursday has failed to arrest the peso’s slide, as the Asian currency tumbled further to Php54.70 vs the US dollar, as per the bank’s selling rate on June 23.

This puts the local currency at its weakest since November 11, 2005, when the Philippine peso closed at 54.71 versus the greenback.

On Thursday (June 23), the Bangko Sentral ng Pilipinas (BSP) raised its benchmark rate for a second month in a row to curb red-hot inflation, but opted for a modest 25-basis-point increase, fearing that more aggressive tightening could compromise growth.

The rate adjustment, which followed a 25-bps increase in May — the first since 2018 — brought the overnight repurchase facility rate to 2.5 per cent, as expected by most economists in a Reuters poll conducted from June 13 to 20.

The BSP also raised rates on the overnight deposit and lending facilities by 25 bps to 2.0 per cent and 3.0 per cent, respectively.

“The Monetary Board believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” BSP Governor Benjamin Diokno said in a statement.

The central bank's decision was correctly predicted by 16 of 22 economists surveyed by Reuters. The rest had expected a 50 bps increase, partly because of last week's aggressive tightening by the U.S. central bank and expectations of its future moves.

“Growth looks set to slow in the second half of the year due to a combination of high commodity prices and weaker external demand,” Gareth Leather, senior Asia economist at Capital Economics, said after the announcement. So the central bank's tightening cycle was unlikely to be aggressive, he said.

Like its global peers, the Philippine central bank is under pressure to raise interest rates further to tame inflation, which last month soared to a three-year high, and support the peso, which has become an added challenge for policymakers.

The narrowing gap between Philippines and U.S. interest rates has weighed on the peso, which slipped on Thursday ahead of the BSP policy briefing, suffering losses for the seventh session in row.

Diokno, who will take on a new role as finance secretary on July 1, said upside risks continued to dominate the inflation outlook amid high commodity prices. Diokno will be replaced by Felipe Medalla, currently a member of the policy-making board.

The BSP lifted its average inflation forecast for this year to 5 per cent from 4.6 per cent previously, well above the 2 per cent-4 per cent target band. For 2023, average inflation is seen hitting 4.2 per cent, up from a previous forecast of 3.9 per cent, also outside the same target range.

Keeping consumer prices in check will be among the key challenges for the incoming government of President-elect Ferdinand Marcos, who said this week he would take on the Department of Agriculture portfolio when he assumed power on June 30.

Medalla has signalled the prospect of a series of rate hikes this year that could extend into 2023 to bring inflation back to target, but he has also said he preferred less aggressive rate hikes.

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