Philippines Ready to Take More Action After Raising Rate

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(Bloomberg) -- The Philippines became the latest emerging market to raise interest rates, with the central bank prepared to take more action after following through with a pledge to curb inflation in a booming economy.

Bangko Sentral ng Pilipinas increased the overnight reverse repurchase rate to 3.25 percent from a record-low 3 percent, it said in a statement in Manila on Thursday. Thirteen of 16 economists predicted the decision, with the rest expecting no change.

The central bank stands ready to undertake further policy action to rein in inflation even as it is too early to determine if more rate hikes are needed, Governor Nestor Espenilla said at a briefing. At this point, the rate increase on Thursday is sufficient to lead inflation back to the target next year, Deputy Governor Diwa Guinigundo said.

“There are several things BSP is looking out for; risk areas that can affect our forecasts including external factors such as oil,” Espenilla said. “What we’re looking at is how these developments feed into inflation expectations which actually is a driver of second-round effects on what we see to be temporary supply side factors.”

Central bankers in emerging markets face their toughest test since the 2013 taper tantrum as the dollar strengthens and U.S. Treasury yields climb. Argentina’s central bank raised rates three times to stem a sell-off in its currency while Indonesia is poised to tighten next week.

In the Philippines, the central bank has been focused on domestic concerns including inflation surging to a five-year high of 4.5 percent -- the fastest among Southeast Asia’s main economies -- and volatility in the currency.

The bank revised its inflation forecasts higher, predicting it will miss the 2 percent to 4 percent target this year.

Central bank CPI forecasts
2018
2019
May4.6%3.4%
March3.9%3%

“The BSP will likely stick to the narrative the pressures are supply-side in nature, a merely transitory phenomenon,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “This justifies not being too aggressive as the effectiveness of a rate increase is probably very limited.”

The peso has declined more than 3 percent against the dollar this year, among the worst performers in Asia, while the benchmark stock index has lost more than 10 percent.

The economy expanded 6.8 percent last quarter, a government report showed earlier, adding to concerns it may be overheating and giving the central bank reason to tighten.

Click to read the report on Philippine GDP growth

©2018 Bloomberg L.P.

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