By Neil Jerome Morales and Karen Lema
MANILA (Reuters) -The Philippine central bank raised its benchmark interest rates by half a percentage point on Thursday, as expected, and kept the door open for further hikes to bring inflation back within its target range.
The Bangko Sentral ng Pilipinas (BSP) hiked the overnight reverse repurchase facility (RRP) rate to 3.75%, in line with economists’ projections in a Reuters poll, while also lifting its 2022 average inflation forecast.
The rates on the overnight deposit and lending facilities were raised by 50 basis points to 3.25% and 4.25%, respectively.
“The Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon,” BSP Governor Felipe Medalla told reporters.
The central bank has raised rates by a total of 175 basis points (bps) this year.
The BSP’s future policy decisions will also take into account the U.S. Federal Reserve’s moves, Medalla said.
The Fed has lifted its benchmark overnight interest rate by 225 points this year and is widely expected to hike rates next month by either 50 or 75 bps.
The Fed’s current tightening cycle has led to heavy capital outflows from emerging markets, hurting currencies including the peso that has fallen nearly 9% this year against the dollar – the third worst performer among Asian currencies.
Philippine inflation, which hit a near four-year high of 6.4% last month, averaged 4.7% in January to July, above the BSP’s 2%-4% target band for the year.
AVERAGE INFLATION FORECAST
The BSP raised its average inflation forecast to 5.4% from 5.0% for 2022, but lowered it to 4.0% from 4.2% for 2023, and to 3.2% from 3.3% for 2024.
Despite the domestic economy’s slowdown in the second quarter, Medalla said overall demand conditions have held firm, supported by improved employment numbers and ample liquidity.
“With inflation expected to peak in October, BSP will likely need to hike at each of the remaining policy meetings in 2022,” said Nicholas Mapa, senior economist at ING, predicting the benchmark RRP to be at 4.50% by year-end.
There will be three more BSP meetings this year – in September, November, and December.
With peak import season toward the end of the year, Mapa also said the peso’s weakness will likely persist.
Ten out of 16 economists in the Aug.
8-15 Reuters poll forecast another 25 bps hike at the September meeting, taking rates to 4.00%, where they were before the COVID-19 pandemic.
Seven economists forecast rates would reach 4.25% or higher by end-2022, six expected rates to reach 4.00%, while the remaining three said rates would be 3.75% or lower.
(Reporting by Neil Jerome Morales, Karen Lema and Enrico Dela Cruz; Editing by Himani Sarkar)
