Philippines signals key rate hike to fight global spillovers

Philippine central bank Governor Felipe Medalla said he would not rule out another interest rate increase in August, a day after delivering a surprise 75 basis-point hike to contain inflation at a near fouryear high.

“We still have room to raise depending on the inflation picture,” Medalla said in an interview with Bloomberg Television’s David ingles on Friday, citing spillover effects from other countries for Thursday’s off-cycle decision. “The need for a 50 basis-point move in August is much less now,” he said.

The Bangko Sentral ng pilipinas (BSP) unexpectedly raised borrowing costs to 3.25 percent, and is now just 75 basis points away from returning rates to 2019 levels.

Soaring inflation is driving central banks globally to embrace large hikes in a single sitting, with some Federal Reserve officials hinting that a far aggressive 100 basis-point move is also in play.

“We are acting on the basis of what is already happening and what we expect to happen,” Medalla said, referring to red hot inflation in the US and the Fed’s upcoming rate review.

he said the Bsp’s view is the Fed will raise rates by 75 basis points this month.

For the philippines, that’s a departure from its previously stated position that it need not match the Fed’s moves like-for-like. The peso’s status as one of Asia’s worst performers this year has added to the urgency to use monetary policy tools sooner than later.

The local currency is down more than 9 percent against the dollar this year and adds to inflation in a country that imports goods from fuel to rice.

The peso fell as much as 0.4 percent, trading at 56.33 to a dollar in the spot market as of 10:20 am in Manila.

Medalla said if the BSP hadn’t done anything, there was a risk of inflation averaging at 4.2 percent in 2023, a level that’s above the central bank’s 2 percent to 4 percent target range.

“The key to us is to increase the chances that we will have below 4 percent inflation next year,” he said.

Finance Secretary Benjamin Diokno earlier expressed confidence that the “robust” philippine economy will “absorb” the surprise 75 basis-point-hike in key interest rates pulled off by the BSP on the same day to rein in the surge in consumer prices.

Diokno, a former BSP governor, said the philippine economy is still on track to grow within their downscaled target of 6.5 percent to 7.5 percent this year, adding that the revised target “has been set to be able to incorporate the various pace of monetary policy normalization by the BSP.”

“Remember [that] the economy was growing at that rate before the pandemic, when policy rate was at 4 percent. We estimate that the economy will be back to where it was before the pandemic by [the] middle of this year, or by the third quarter of 2022 at the latest. The BSP simply accelerated the normalization process,” Diokno told reporters in a message.

The BSP Monetary Board decided to raise the interest rate on the overnight repurchase facility by 75 basis points to 3.25 percent, effective Thursday, the same day it was announced. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2.75 percent and 3.75 percent, respectively.

previously, the BSP had backto-back 25-basis point hikes in May and June.