Visitors at the Bay amusement park in Metro Manila. Consumer prices in the Philippines increased at the fastest pace in more than five years in July to an annual 5.7 per cent. Image Credit: Bloomberg

MANILA: The Philippine central bank on Thursday made its biggest rate hike in 10 years, raising key interest rates by 50 basis points, leaving door open for further policy tightening to fight high inflation despite economic growth losing steam.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla, justifying the move after the economy expanded at its slowest pace in nearly three years in April-June, said addressing rising price pressures “is not necessarily anti-growth”.

He asserted the economy remains “on a strong footing and it can take adjustments like this so we can achieve a more sustainable growth over the medium term.” As most economists expected, the central bank’s policy-making Monetary Board raised the overnight borrowing rate to 4.0 per cent. The rates on the overnight lending and deposit facilities were also raised by 50 bps (basis points).

The hike was the central bank’s most aggressive since the global financial crisis in 2008, and many analysts expect further rate increases. “The BSP delivered a strong message but the market has priced it in already,” said Jonathan Ravelas, market strategist at BDO Unibank in Manila, who is looking at another 25 bps hike in the fourth quarter.

After Thursday’s move, the peso erased losses from disappointing second-quarter growth data, briefly rising 0.1 per cent against the dollar, before settling a tad weaker.

Espenilla said inflation expectations remained “elevated”, with monetary authorities raising inflation forecasts for this year and next.

Battling inflation risks

The Monetary Board “deemed stronger monetary action to be necessary to rein in inflation expectations,” Espenilla said, adding that the board “believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation.” Thursday’s rate increase is the third since May and made the Philippine central bank the second Southeast Asian one, after Indonesia, to hike at three consecutive policy meetings this year, by a total of 100 basis points.

Both countries are seeking to prop up weak currencies, as interest rate increases in the United States and their current account deficits have led to capital outflows. And both are worried that the US-China trade war could exacerbate economic problems.

But the Philippines, unlike Indonesia, is battling inflation, which in July shot up to an annual 5.7 per cent, its highest in more than five years.

Espenilla said the BSP “reiterates its strong commitment and readiness to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability.” The BSP raised its average 2018 inflation forecasts to 4.9 per cent, from 4.5 per cent, and the 2019 projection to 3.7 per cent from 3.3 per cent.

Impact on growth

The central bank action came hours after the government said the economy grew 6.0 per cent in April-June, well below the 6.7 per cent that economists had predicted and following 10 quarters of above-6.0 per cent expansion.

While the central bank is “concerned about the country’s growth prospects”, Espenilla argued that the second-quarter pace is not a low number.

The Philippine economy remains one of the fastest growing in Asia, but the surprise second-quarter GDP slowdown increases the challenge for a government that’s funding a multibillion dollar infrastructure overhaul and a central bank wrestling with high inflation.

Earlier on Thursday, Economic Planning Secretary Ernesto Pernia said the economy has to expand 7.7 per cent in the second half to achieve the lower end of the government’s 7-8 per cent target for this year.

Rajiv Biswas, an economist at IHS Markit, said the 100 basis point rate hike since May “will be a moderate drag on GDP growth over coming quarters”.