Philippines raises key rate on inflation risks, Peso slump

THE Philippine central bank increased its key interest rate for a second straight meeting and raised its inflation forecast, continuing a gradual pace of normalisation while it faces a slumping currency. 

Bangko Sentral ng Pilipinas (BSP) raised the benchmark rate by 25 basis points to 2.5 per cent, it said in a statement on Thursday (Jun 23), as forecast by 17 of 25 economists in a Bloomberg survey. The rest saw a half-point increase.

The peso was 0.1 per cent lower at 54.5 per dollar as of 3.06 pm local time, holding near its weakest level since 2005. The benchmark stock gauge closed down 1.7 per cent before the decision. 

BSP’s rate-hike cycle is picking up momentum as inflation accelerates at its quickest in more than 3 years. Many policy makers in South-east Asia have been relatively slower than other global central banks, particularly the Federal Reserve, in normalising rates as they focus on solidifying their economic recoveries from the pandemic.

The central bank is “prepared to take all necessary policy action” to get consumer price rises back toward its goal of 2 to 4 per cent over the medium term, Governor Benjamin Diokno said in a briefing. The central bank raised its inflation outlook for this year to 5 per cent, up from 4.6 per cent last month, and flagged that inflation expectations have continued to rise.

“Despite inflation blowing past target again this year, BSP believes that the current surge in prices is largely cost push and therefore does not warrant an aggressive rate hike cycle,” said Nicholas Mapa, an economist at ING Groep. The “relatively less aggressive pace of tightening” shows the need to support growth, he said.

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The BSP also sees prices next year gaining 4.2 per cent, from 3.9 per cent earlier, before easing to 3.3 per cent in 2024.

Incoming Governor Felipe Medalla, who will take over from Diokno on Jul 1, had flagged another quarter-point rate hike in August and possibly increases of similar sizes for the rest of the year. The gradual speed of policy tightening helped push the peso to its lowest against the dollar since 2005 this week. BLOOMBERG