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GDP growth slows to 6% in second quarter

The Philippine central bank raises a key rate by 50 basis points, the most in a decade.

MANILA: The Philippine central bank raised key interest rates by 50 basis points yesterday, the most in a decade, and left the door open for further policy tightening to fight inflation despite economic growth losing steam.

As widely expected, Bangko Sentral ng Pilipinas’ policy-making Monetary Board raised the overnight borrowing rate to 4.0%. The rates on the overnight lending and deposit facilities were raised by the same magnitude.

The hike was the BSP’s most aggressive since the global financial crisis in 2008, and many analysts expect more rate increases.

After the move, the peso erased losses from disappointing second-quarter growth data, briefly rising 0.1% against the dollar, before settling a tad weaker.

BSP governor Nestor Espenilla said inflation expectations remained “elevated”, with monetary authorities raising inflation forecasts for this year and next.

“For these reasons, the Monetary Board deemed stronger monetary action to be necessary to rein in inflation expectations,” he told a news conference.

“The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation.”

The rate increase is the third since May and made the Philippine central bank the second Southeast Asian one, after Indonesia, to hike at three consecutive policy meetings this year, by a total of 100 basis points.

Both countries are seeking to prop up weak currencies, as interest rate increases in the US and their current account deficits have caused them to be hit by capital outflows. And both are worried that the US-China trade war could exacerbate economic problems.

But the Philippines, unlike Indonesia, is battling inflation, which in July shot up to an annual 5.7%, its highest level in more than five years.

“The BSP reiterates its strong commitment and readiness to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability,” Espenilla said.

The central bank raised its average inflation forecasts to 4.9% for this year and 3.7% for 2019, from 4.5% and 3.3%, respectively.

The bank’s announcements came hours after the government said economic growth unexpectedly slipped to near three-year lows of 6% in the second quarter.

The year-on-year growth was well below the 6.7% forecast in a Reuters poll of economists and was slower than the downwardly revised 6.6% growth in the first quarter.

The second-quarter growth matched the 6% pace in the third quarter of 2015.

Economic Planning Secretary Ernesto Pernia told a news conference the data was disappointing, adding that “this growth is less than what we have hoped for.”

“To be fair and put things in proper context, the slowdown is partly due to policy decisions undertaken that are expected to promote sustainable and resilient development.”

He said factors that contributed to the slower growth were the closure of several mines as part of an environmental crackdown and the six-month shutting of the country’s biggest tourist destination, Boracay island, which draws two million annual visitors.

Manila is targeting growth of 7-8% this year, which is more optimistic than the 6.8% growth forecast of the Asian Development Bank and the International Monetary Fund’s 6.7% projection.

“The economy has to expand by 7.7% in the second half of the year to achieve the lower end of the government’s target,’’ Pernia said.