Philippines hikes rate while signaling gradual normalisation

MANILA, May 21 (Bloomberg): The Philippine central bank raised its key interest rate for the first time since 2018 to combat Southeast Asia’s second-fastest inflation.

Bangko Sentral ng Pilipinas increased the benchmark rate by 25 basis points to 2.25%, it said in a statement on Thursday, as forecast by 14 of 21 economists in a Bloomberg survey. The rest saw no change.

Philippines joined global central banks in battling price pressures fanned by the war in Europe and supply disruptions from virus lockdowns in China, while hinting that the pace of tightening may be gradual compared to most peers.

The Federal Reserve hiked its key rate by half-point earlier this month and signaled more, while the Indian central bank raised borrowing costs by 40 basis points.

"The pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes,” Governor Benjamin Diokno said at a briefing. He described Thursday’s increase as "timely” and one that will help arrest second-round inflation effects.

Consumer price inflation is currently at 4.9%, well above the central bank’s 2%-4% target band.

Inflation expectations have risen as second-round inflation effects -- including wage hikes in some regions -- have emerged, the governor said. Risks to price growth is on the upside for this year and the next, he said.

"This is only the beginning and future policy actions are going to be geared toward containing inflation risks now that BSP is more comfortable with the growth outlook,” said Euben Paracuelles, an economist at Nomura Holdings Inc. BSP may hike successively should price growth head to above 5%, he said.

Liquidity Tools

Diokno also announced shifting the pandemic-era bond buying window to a regular facility to manage money supply.

BSP needs to make the facility more active, where it will determine the amount and tenor of bonds to be bought or sold, Deputy Governor Francis Dakila said at the same briefing. This will "strengthen the government securities window’s effectiveness as a tool for liquidity provision or absorption.”

The government will also fully pay its loan from the BSP this week, ahead of its maturity next month, Governor Diokno said.

The peso pared an earlier gain of as much as 0.3% to close unchanged at 52.45 per dollar. The nation’s benchmark stocks index fell 1% at close before the rate decision.

"The move was expected,” said Nicholas Mapa, economist at ING Groep NV in Manila. "The bigger development was the quick walk back of pandemic support with BSP closing the provisional advance and tweaking the bond purchase window.” - Bloomberg

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Philippines , Central Bank , Covid-19 , Lessening , Issues


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