Tuesday, July 5

Philippines kicks off rate hikes to curb inflationary pressures


Article content

MANILA — The Philippine central bank raised interest rates for the first time since 2018 on Thursday, joining peers around world in a rush to stem intensifying inflationary pressures that could derail the country’s economic recovery.

The central bank also said the strong economic rebound and labor market conditions in the first quarter provide scope “to continue rolling back its pandemic-induced interventions,” signaling further tightening could be expected.

The economy may expand even faster in the second quarter than the better-than-expected 8.3% annual pace in January-March, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said.

Article content

The BSP lifted the overnight reverse repurchase facility rate by 25 basis points (bps) to 2.25%, as expected by the majority of 17 economists in a May 12-16 Reuters poll.

The rates on the overnight deposit and lending facilities were likewise raised by 25 bps to 1.75% and 2.75%, respectively.

The BSP slashed interest rates by a cumulative 200 bps in 2020 to help the economy weather COVID-19 lockdowns.

“Persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations,” Diokno said.

Any further policy action, however, will be data-driven, he said.

The BSP raised its 2022 average inflation forecast to 4.6%, from 4.3%, above its 2%-4% closer band. For 2023, inflation is seen to the upper end of the same target range at 3.9%.

Article content

Philippine inflation climbed to 4.9% in April year-on-year, the highest since December 2018, and Diokno said it could likely exceed 5% in the next few months.

Diokno also cited the emergence of additional factors that could push inflation higher, such as minimum wage increases that will take effect next month in some regions, including metropolitan Manila.

Last month, Diokno said it would take two to three rate hikes, plus a pullback in oil prices, to bring inflation back within target.

But Alex Holmes, economist at Capital Economics, said the BSP’s tightening cycle may be gradual and relatively short as inflation is likely to slow later this year and the economic recovery could lose momentum.

“The BSP’s tightening cycle is unlikely to be long, with the policy rate likely to settle lower than its pre-pandemic level of 4.0%,” he said.

Given ample liquidity and stable market conditions, meanwhile, Diokno said the central bank also decided to reconfigure its government securities purchasing window to “enhance the BSP’s ability to manage domestic liquidity conditions and ensure the sustainability of its balance sheet.”

(Reporting by Neil Jerome Morales, Karen Lema and Enrico Dela Cruz; Editing by Kanupriya Kapoor, Tom Hogue and Kim Coghill)



financialpost.com