Philippines hikes rates to stave off inflation

MANILA: The Philippine central bank raised interest rates for the first time in more than three years yesterday, to head off rising inflation as its economy continues to speed along at a solid clip.

The Southeast Asian nation’s rate increase was seen as a pre-emptive strike against rising import costs as oil prices climb and could help stem capital outflows triggered by higher US rates. Philippine markets, as with others in Asia, have been hit in recent months by foreign investment outflows.

The central bank’s policy-making Monetary Board raised the overnight borrowing rate by 25 basis points to 3.25%, as widely expected by economists. The rates on the overnight lending and deposit facilities were also raised accordingly.

The Philippines’ decision to raise rates came after central banks in New Zealand and Malaysia kept monetary policy unchanged earlier yesterday, and it posted strong first quarter gross domestic product (GDP) growth.

The Philippine economy clocked 6.8% annual growth in the first quarter, faster than the fourth quarter’s 6.5% growth. From the previous three months, GDP expanded 1.5%, in line with the December quarter’s pace.

The central bank said inflation was likely to edge further away from its 2-4% target range this year due to higher oil prices and additional taxes on some commodities, but was expected to drift lower next year.

Average inflation was projected to accelerate to 4.6% in 2018, from an earlier forecast of 3.9%. Inflation next year would average 3.4% compared with a previous estimate of 3%.

“The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in policy without adversely affecting the country’s growth momentum”, Bangko Sentral ng Pilipinas governor Nestor Espenilla told a news conference.

Espenilla said the central bank believes higher policy rates will “help arrest potential second round effects by tempering the build up in inflation expectations.”

The peso rose 0.3% after the GDP data. It finished at 51.80 to the US dollar yesterday, firmer than the previous day’s close of 52.01. – Reuters