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BSP raises key interest rate on inflation risks, peso slump

·2-min read
MANILA, PHILIPPINES - 2021/12/31: Filipinos shop for fruits at a fresh section in Divisoria on New Year's Eve. (Photo by Josefiel Rivera/SOPA Images/LightRocket via Getty Images)
Filipinos shopping for fruits in Divisoria. (Photo by Josefiel Rivera/SOPA Images/LightRocket via Getty Images)

By Siegfrid Alegado, Andreo Calonzo and Ditas Lopez

(Bloomberg) —The Philippine central bank increased its key interest rate for a second straight meeting and raised its inflation forecast, continuing a gradual pace of normalization while it faces a slumping currency.

Bangko Sentral ng Pilipinas raised the benchmark rate by 25 basis points to 2.5%, it said in a statement on Thursday, as forecast by 17 of 25 economists in a Bloomberg survey. The rest saw a half-point increase.

The peso was 0.1% lower at 54.5 per dollar as of 3:06pm local time, holding near its weakest level since 2005. The benchmark stock gauge closed down 1.7% before the decision.

BSP’s rate-hike cycle is picking up momentum as inflation accelerates at its quickest in more than three years. Many policy makers in Southeast Asia have been relatively slower than other global central banks, particularly the Federal Reserve, in normalizing rates as they focus on solidifying their economic recoveries from the pandemic.

The central bank is “prepared to take all necessary policy action” to get consumer price rises back toward its goal of 2% to 4% over the medium term, Governor Benjamin Diokno said in a briefing. The central bank raised its inflation outlook for this year to 5%, up from 4.6% last month, and flagged that inflation expectations have continued to rise.

“Despite inflation blowing past target again this year, BSP believes that the current surge in prices is largely cost push and therefore does not warrant an aggressive rate hike cycle,” said Nicholas Mapa, an economist at ING Groep NV. The “relatively less aggressive pace of tightening” shows the need to support growth, he said.

The BSP also sees prices next year gaining 4.2%, from 3.9% earlier, before easing to 3.3% in 2024.

Incoming Governor Felipe Medalla, who will take over from Diokno on July 1, had flagged another quarter-point rate hike in August and possibly increases of similar sizes for the rest of the year. The gradual speed of policy tightening helped push the peso to its lowest against the dollar since 2005 this week.

—With assistance from Tomoko Sato, Michael J. Munoz, Clarissa Batino, Cecilia Yap and Xiao Zibang.

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