Philippine delivers back-to-back rate hike to tame inflation

The Philippine central bank raised interest rates on Wednesday, for the second time in six weeks, and said it was ready to take further action to tame inflation and volatility in the peso. The Philippines, like other Asian economies that have external deficits, faces pressure to follow the US Federal Reserve in shifting away from low interest rate settings or risk capital flight as investors seek higher yielding assets.
The Philippines' decision came shortly after Thailand's central bank kept rates unchanged. Unlike the Philippines, Thailand has a current account surplus and low inflation, which means it is under no immediate pressure to track Fed policy. The Philippine central bank's Monetary Board hiked the overnight borrowing rate by 25 basis points to 3.5 percent, following up on a rate increase in May which was the first in more than three years.
The Philippines is the second central bank in the region to deliver two hikes in back-to-back meetings - Indonesia raised rates twice in May. The decision was a close call with only seven of 12 analysts in a Reuters poll predicting a hike. The rest had expected rates to be kept on hold.
"The BSP is prepared to take further policy action as needed to achieve its price and financial stability objectives," the central bank said in a statement. Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla said the decision to raise rates was to keep inflation expectations from spiking and risking an upward spiral in consumer prices, which rose to their highest in five years in May.
"Inflation expectations remained elevated for 2018 and the risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action", Espenilla told a news conference. The central bank revised downwards its average inflation forecast for this year to 4.5 percent from an earlier estimate of 4.6 percent. It also lowered its average inflation projection for next year to 3.3 percent from 3.4 percent.
With inflation projected to ease and return to within the central bank's 2-4 percent target in 2019, Espenilla signalled there was no urgent need for further rate hikes. Central bank deputy governor Diwa Guinigundo said inflation would likely peak in the third quarter, leading some analysts to believe rates would be kept on hold for the rest of the year.
"The BSP struck a neutral tone following today's hike," said Noelan Arbis economist at HSBC. "As such, we don't expect any additional rate hikes for this year should inflationary pressures continue to ease." Others felt BSP's readiness to take further action meant the door to another hike was open. "We therefore maintain our forecast that BSP will follow up with another 25 basis point policy rate hike at its next meeting in August, taking the policy rate to 3.75 percent this year," Nomura said in a research note.
The central bank's decision was announced after the peso closed at 53.48 to the dollar, slightly weaker than Tuesday's close of 53.44 and after the stock market dropped to a near 15-month low. The peso has lost 7 percent against the greenback from January highs, making it Asia's worst performing currency. Espenilla said the central bank would remain vigilant against excessive peso volatility and it was prepared to "use everything in its tool box to keep order in the domestic market."