Philippine interest rate hike looms
manila — A small economy that’s constantly battling risks beyond its control like typhoons and oil prices has been one of the most successful in managing inflation in Asia.
The Philippine central bank, which has an annual inflation target that’s currently set at two per cent to four per cent, met its goal six times in the past eight years and the two times it failed were because prices were too low.
Policy makers’ credibility in the Philippines is now being put to the test. The economy is expanding more than six per cent a year and risks overheating, adding to inflation pressures. Economists predict the bank will be among the first to follow South Korea in raising interest rates next year, with two analysts saying it could happen as early as Thursday. The rest forecast the benchmark rate will be held at a record-low three per cent.
“Growth is robust and inflationary risks are tilted to the upside,” said Gundy Cahyadi, an economist at DBS Group Holdings in Singapore who predicts a rate increase this week. “Given the expansionary fiscal policy and strong investment growth, a rate hike is probably warranted to prevent overheating risks.”
The central bank adopted inflation-targeting in 2002 in the aftermath of the Asian financial crisis in the late 1990s when consumer prices soared beyond 10 per cent. Since then, it’s managed to bring inflation consistently down, with it forecast to average 3.2 per cent this year, Governor Nestor Espenilla said this month.
“We certainly take pride in our decision to shift from monetary aggregate targeting to flexible inflation targeting,” Deputy Governor Diwa Guinigundo said. “It makes monetary policy more preemptive, forward-looking and accountable.”
It’s that proactive stance that may push policy makers to move. The currency has dropped 1.5 per cent against the dollar this year, the worst performer in Asia, while the economy is set for its first currentaccount deficit in 15 years. Bank loans are growing more than 10 per cent.
“We aren’t sure they are on top of the game right now,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. — Bloomberg