Biggest Rate Hike in a Decade on the Cards for Philippines

(Bloomberg) -- The question facing policy makers in the Philippines is not whether to raise interest rates for a third time in a row, but by how much.

A booming economy, surging inflation and pressure on the currency are setting the stage for a 50 basis-point increase in the benchmark rate to 4 percent on Thursday, according to most of the 17 economists surveyed by Bloomberg. That would be the biggest hike since 2008 and follows a similar move by Indonesia as central banks in emerging markets take more aggressive steps to curb the fallout from rising U.S. rates and a stronger dollar.

Biggest Rate Hike in a Decade on the Cards for Philippines

“With rising inflation and inflation expectations, the central bank will likely implement a more aggressive rate increase,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore, who penciled in a half-point increase. “We also expect that they will leave the door open for more rate hikes.”

Facing criticism that the central bank was too slow to act, Governor Nestor Espenilla has been preparing the markets for more decisive action, saying he’ll take “strong” steps to rein in inflation after it climbed above 5 percent. With data on Thursday set to show the economy sustained growth of more than 6 percent in the second quarter, a rate hike is all but sealed.

Click to read Espenilla pledging “strong” action to damp inflation

Despite the recent rate increases, the economy is expected to remain strong, supported by the government’s massive infrastructure program and robust consumer spending. The economy expanded a revised 6.6 percent in the first quarter from a year earlier, the statistics agency said on Wednesday.

“There won’t be any significant spillovers to the growth cycle,” said Rahul Bajoria, a senior economist at Barclays Plc. in Singapore, who forecast a half-point hike this week.

Regional Tightening

Other central banks in Asia are also tightening monetary policy. Indonesia has raised its benchmark rate by 1 percentage point since May, while India increased its policy rate a second time this year in August.

In the Philippines, higher global oil costs, an increase in levies on fuel, sugary drinks and cigarettes and record rice prices boosted inflation to a five-year high of 5.7 percent in July.

Inflation is set to breach the central bank’s 2 percent to 4 percent target band in 2018, with the peso’s more than 5 percent slump against the dollar this year adding to concerns. The peso fell 0.1 percent to 53.065 per dollar on Wednesday, while the benchmark stock index gained 1.1 percent.

While being an independent body, the central bank is facing mounting political pressure as more lawmakers join in the criticism of its failure to curb inflation. Congressman Joey Salceda, economic liaison of House Speaker Gloria Arroyo, said on Wednesday a half-point rate increase is needed and that monetary response this year has so far been “weak.”

The Philippines is the only Southeast Asian economy to have negative real interest rates at -2.2 percent.

Biggest Rate Hike in a Decade on the Cards for Philippines

Bangko Sentral ng Pilipinas raised its benchmark rate by 25 basis points at each of its May and June meetings. The last time the central bank raised the key rate by more than a quarter-point was in July 2008 when it hiked by 50 basis points.

Analysts will be closely looking at the central bank’s rhetoric on Thursday, with officials expected to maintain a hawkish stance.

“A neutral or dovish statement from BSP, even with a 50 basis points hike, is likely to disappoint markets,” Chidu Narayanan, Asia economist at Standard Chartered Plc in Singapore, said in a note this week. “We expect it to maintain a hawkish stance, reiterating its ‘commitment to take decisive action’.”

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