MANILA (Reuters) - The Philippine central bank raised its benchmark interest rates for the fourth time in five months on Thursday, pushing them to seven-year highs, and kept the door open for further tightening as it battles to cool inflation.
With prices rising at the fastest pace in nearly a decade, the central bank’s Monetary Board voted to increase the rate on its reverse repurchase facility PHCBIR=ECI by 50 basis points (bps) to 4.5 percent.
It also raised the rates on the overnight lending and deposit facilities by the same amount.
The Bangko Sentral ng Pilipinas and Bank Indonesia have been the most aggressive central banks in Asia so far this year as their currencies take a beating. Both have now raised rates by 150 bps since May. Indonesia also hiked on Thursday, by a quarter-point.
Analysts said further BSP hikes are likely after the central bank said it was strongly committed “to take all necessary policy actions to address the threat of high inflation.”
The latest move had been widely expected by most analysts in a Reuters poll and followed a similar 50 bps hike in August, which was the biggest in 10 years.
“The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” the central bank said in a statement.
In August, inflation surged to a more than nine-year high of 6.4 percent, way above the central bank’s 2-4 percent comfort range. It has been steadily rising due this year due to higher taxes, the weak peso, and rising food and fuel costs.
The BSP’s key rate is now the highest since December 2011. It set the policy rate at 3.0 percent when it moved to an interest rate corridor framework in 2016 to make policy transmission faster and more efficient.
GRAPHIC: Asian central bank policy rates interactive - tmsnrt.rs/1U5hc2W
The BSP also raised its average inflation forecasts to 5.2 percent for 2018, from 4.9 percent, and to 4.3 percent for 2019, from 3.7 percent, well above the target range.
BSP Officer-in-Charge Chuchi Fonacier said supply-side forces are expected to continue to drive inflation in the coming months. Fonacier also said that inflation expectations have remained elevated amid signs that price rises are still spreading through the broader economy.
“With inflation set to rise further over the coming months, and worries growing about inflation expectations becoming entrenched, further hikes look to be on the cards,” Gareth Leather at Capital Economics said in a note to clients, adding the headline inflation rate could hit 7 percent by year-end before various measures have an impact on prices.
Central bank officials reiterated that the economy remains strong enough to cope with higher borrowing costs.
The economy is likely to grow at the same year-on-year pace in the third quarter as the second quarter’s 6.0 percent, supported by strong domestic demand, said BSP Managing Director Francisco Dakila.
The peso PHP= firmed before Thursday's policy decision but ended the day little changed at 54.230 to the dollar, after falling to its weakest since end-2005 the day before. It has lost nearly 8 percent of its value this year.
“We continue to see risks that will BSP will hike again this year given its clear hawkish signals and its forecast that inflation could remain above target again next year,” said Euben Paracuelles of Nomura.
Reporting by Karen Lema and Neil Jerome Morales; Writing by Enrico dela Cruz; Editing by Kim Coghill