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Philippines Raises Key Rate for Second Month Amid Peso Rout

Philippine Peso banknotes. (Photo: Getty Images)

By Ditas Lopez and Siegfrid Alegado

The Philippine central bank increased its benchmark interest rate for a second month, following through on a pledge to curb inflation and support one of Asia’s worst-performing currencies.

Bangko Sentral ng Pilipinas increased the overnight reverse repurchase rate by 25 basis points to 3.5 percent, it said in a statement in Manila on Wednesday. Eleven of the 17 economists surveyed by Bloomberg predicted the decision, with the rest expecting no change.

Governor Nestor Espenilla, who has been building the case for another rate hike, told reporters on Wednesday the central bank is prepared to take further policy action as needed, and will remain vigilant against excessive volatility in the currency that could worsen the inflation outlook.

“We will continue to monitor the data flow and see whether what we have done so far through policy rate hikes are sufficient to secure our return to the target range by next year,” he said. “We’re still looking out if inflationary trends will further broaden and whether there will be second-round effects, and this remains to be seen.”

Rising price pressures are adding to the market turmoil in the Philippines amid a global emerging-market rout triggered by higher U.S. interest rates and a stronger dollar. Central banks from Argentina to Indonesia are taking stronger action to stem outflows and bolster their currencies.

The peso is vying with India’s rupee as Asia’s worst-performing currency this year, down more than 6 percent against the dollar. The currency fell less than 0.1 percent to 53.48 against the dollar at its close on Wednesday before the rate decision.

“While BSP hiked as we had expected, we believe further weakness in peso cannot be ruled out,” said Jiaxin Lu, an economist at Continuum Economics in Singapore. “We believe BSP needs further and stronger commitment to ensuring stability. Further hikes still remain likely.”

Espenilla has warned that inflation pressure from rising fuel costs may spread to other parts of the economy and potentially boost wage demands. Consumer prices rose 4.6 percent in May from a year ago, the fastest pace in five years, while the economy is expanding more than 6 percent on the back of an infrastructure push.

The central bank expects to miss its 2 percent to 4 percent inflation target this year, forecasting consumer-price growth of 4.5 percent in 2018, slightly lower than its 4.6 percent projection last month. It sees inflation slowing to 3.3 percent in 2019.

Espenilla also made the following comments on the currency:

On actions to curb volatility: “The BSP has a great toolbox. We will use everything in our toolbox to keep order in our domestic market” On available tools: “A country decides on tools they will use depending on the situation they are facing. So it depends on what’s driving the excessive volatility. If it’s speculative activity, there are specific things the BSP can do within its full regulatory powers” On signs of speculative action: “There seems to be some basis for thinking that. And from the perspective of our main objective to keep inflation low and stable, there is some impact of the exchange volatility on the mindset which basically helps inform inflation expectations. The BSP can’t ignore these things.”

 

To contact the reporters on this story: Ditas Lopez in Manila at dlopez55@bloomberg.net; Siegfrid Alegado in Manila at aalegado1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net; Chris Bourke

© 2018 Bloomberg L.P