BSP raises rates while BI stands pat as expected

The Philippine central bank raised its benchmark rate for a second month in a row yesterday to curb red-hot inflation, but opted for a modest 25-basis-point increase, fearing that more aggressive tightening could compromise growth.

The rate adjustment, which followed a 25-bps increase in May — the first since 2018 — brought the overnight repurchase facility rate to 2.5%, as expected by most economists in a Reuters poll conducted from June 13 to 20.

The Bangko Sentral ng Pilipinas (BSP) also raised rates on the overnight deposit and lending facilities by 25 bps to 2% and 3%, respectively.

“The Monetary Board believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” BSP governor Benjamin Diokno said in a statement.

The central bank’s decision was correctly predicted by 16 of 22 economists surveyed by Reuters. The rest had expected a 50 bps increase, partly because of last week’s aggressive tightening by the US central bank and expectations of its future moves.

The BSP lifted its average inflation forecast for this year to 5% from 4.6% previously, well above the 2-4% target band. For 2023, average inflation is seen hitting 4.2%, up from a previous forecast of 3.9%, also outside the same target range.

In Jakarta, Bank Indonesia yesterday left interest rates at a record low, saying it was monitoring risks from rising inflation and would adjust monetary policy as needed.

Analysts expect BI to raise rates in the third quarter to shore up a weaker rupiah currency as it faces pressure from rising US interest rates.

BI kept the benchmark seven-day reverse repurchase rate at 3.50%, as expected by the majority of economists in a Reuters poll. Its two other policy rates were also unchanged.

BI governor Perry Warjiyo said in a news conference that he would continue to monitor inflation, including inflation expectations and take monetary measures as needed.

Inflation may slightly overshoot its target this year to 4.2% by year-end, he reiterated, adding the authorities had been taking rupiah stabilisation measures to contain imported inflation.

Economists in the Reuters poll expect BI’s first rate hike will come in the next quarter.