The Philippine central bank, called the BSP (Bangko Sentral ng Pilipinas)
The main building of the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank building, on Roxas Boulevard facing the Manila Bay Image Credit: Gulf New file photo

Manila: The Philippine central bank raised its key policy rate by 75 basis points on Thursday and signalled more rate hikes ahead, worried by potential threats to the economy from a weakening peso and the prospect of entrenched inflation.

Bangko Sentral ng Pilipinas Governor Felipe Medalla, who had already signalled early this month that he would vote to hike rates by three-quarters of a point, has stressed that a hefty rate hike was needed to head off currency declines.

"(If peso weakness) is allowed to continue, that depreciation ... could also trigger disanchoring of price expectations," Medalla told a news briefing after the rate announcement.

"We do not want inflation to get out of hand and be entrenched," he said, hinting of more tightening ahead, albeit at a less aggressive pace.

The central bank's latest forecasts indicate that inflation would not return to the 2%-4% target range until 2024, after averaging 5.8 per cent this year and 4.3 per cent next year.

Medalla said he was confident that the economy, which expanded at a faster-than-expected 7.6 per cent rate in the third quarter, could withstand further rate hikes.

Thursday's adjustment, the sixth this year, brought the rate on the central bank's overnight reverse repurchase facility to 5.0 per cent, the highest in nearly 14 years, and compares with the U.S. Federal Reserve's 3.75 per cent to 4 per cent policy rate.

Medalla reiterated that a move that big was needed to match the Fed's action and prevent a sharp narrowing of the differential between U.S. and Philippine rates.

A shrinking rate gap has spurred an 11 per cent decline in the peso against the dollar so far this year and raised the cost of fuel and other imported goods, driving inflation in the Philippines last month to its highest in nearly 14 years.

Medalla said the central bank would take a less aggressive stance in the future after Thursday's move and an off-cycle 75 basis point rate increase in July.

"We will probably do less of the two recent, unusual, not run-of-the-mill actions," he said.

With the Fed expected to continue hiking rates, however, economists believe the central bank will remain on its tightening path.

Emilio Neri, economist at the Bank of the Philippine Islands, said that if the Fed raises its policy rate to 5.25 per cent, the Philippines' overnight borrowing rate could exceed 6.0 per cent.