BSP hikes interest rates to counter inflation

The Bangko Sentral ng Pilipinas (BSP) yesterday hiked key overnight rates by 50 basis points with 2019 inflation path now in peril of nearing the top-end estimate of four percent.

The last time the Monetary Board raised benchmark rates by 50 basis points was in July 17, 2008 and at the time, the motive was to control inflation, similar with what is happening today.

After the adjustment, BSP overnight borrowing rate will rise to 4.00% from 3.50% and its overnight lending rate to 4.50% from 4.00%, effective Friday. That marked the third consecutive meeting at which the central bank has raised rates this year, starting in May.

Meanwhile, the peso closed lower yesterday at 153.09. The

BSP adjusted inflation forecasts for 2018 which they now see higher at 4.9 percent from its last estimate of 4.5 percent (from June 20, after increasing rates by 25 basis points). For 2019, inflation is expected to average at 3.7 percent from the previous forecast of 3.3 percent, closer to the top end of the two-four percent inflation target for next year. In 2020, the BSP forecast the inflation rate to average 3.2%.

BSP Governor Nestor A. Espenilla Jr. yesterday said that risks of inflation exceeding the target in 2019 is higher and the upside risks continue to dominate the inflation outlook due to the “sustained increase in core inflation (which) suggests broadening price pressures amid resilient aggregate demand conditions.”

Espenilla said the Monetary Board “deemed stronger monetary action to be necessary to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects.”

The Philippine central bank raised its benchmark interest rates, as widely expected, with inflation far above its target.

The unanimous view in a poll of economists by The Wall Street Journal was for the central bank to raise rates after the nation's consumer-price index rose 5.7% on year in July, accelerating from a 5.2% rise in June and a low of 2.9% in January. Most economists had predicted the BSP to raise rates by 0.5 percentage point, compared with 0.25 percentage point each in May and June.

Inflation in the first seven months of this year has averaged 4.5%, higher than the bank's target range of between 2% and 4%.

The tightening move came even as the government reported a sharp deceleration in economic growth earlier on Thursday. Gross Domestic Product rose 6.0% on-year in the second quarter, compared with analyst expectations for 6.6% growth. The government also reduced first-quarter GDP growth to 6.6% from the 6.8% reported earlier.

The rate hike came hours after data showed economic growth slowed to a three-year low of 6 percent in the second quarter, missing all economists’ estimates in a Bloomberg survey.

Political pressure has also mounted, with President Rodrigo Duterte’s spokesman saying this week the president is “gravely concerned” by the pick-up in inflation and House Speaker Gloria Arroyo calling for half a percentage point rate hike.

The peso is down about 6 percent against the dollar this year, while the Philippine Stock Exchange Index has lost more than 8 percent. (With WSJ and Bloomberg reports)