Philippine central bank hastens interest rate rise, ready for more action

The Philippine central bank raised its key interest rates by 75 basis points in a surprise move on Thursday and kept the door open for further tightening as it rushed to contain broadening inflationary pressure and rescue a faltering peso.

Implemented outside the regular policy-meeting cycle, the tightening move was the most aggressive by the Bangko Sentral ng Pilipinas (BSP) since the central bank shifted to an inflation-targetting approach in 2002.

The rise in interest rates accompanied policy shifts effected by other central banks in Asia and elsewhere on Wednesday and Thursday. They included one in Singapore that was also an off-cycle move.

In the Philippines, the rate on the key overnight reverse repurchase facility rose to 3.25%, BSP Governor Felipe Medalla said in a statement.

“In raising the policy interest rate anew, the Monetary Board recognized that a significant further tightening of monetary policy was warranted by signs of sustained and broadening price pressures amid the ongoing normalization of monetary policy settings,” Medalla said.

The rates on the BSPs overnight deposit and lending facilities were also raised by 75 basis points, to 2.75% and 3.75%, respectively.

No such move was expected on Thursday because the BSP did not have a regular policy meeting scheduled until Aug. 18. The central bank previously raised interest rates by 25 basis points in May and again in June.

Medalla said the BSP would still hold the Aug. 18 meeting, and policy moves remained data-dependent.

Inflation surged to the highest level in nearly four years in June, and is widely expected to remain elevated, pushing the full-year average beyond the target band of 2% to 4%.

Finance Secretary Benjamin Diokno said the economy remained robust and could thus absorb Thursdays interest rate rise. It would remain supported by the easing of COVID-19 restrictions and structural reforms, he added.

Peso recovers

The Philippine peso, which had hit a record low early this week versus the U.S. dollar, recovered some lost ground and was last up 0.3%.

The peso is the worst-performing currency in Southeast Asia this year as the greenback continues to strengthen on expectations for faster Federal Reserve policy tightening.

The Fed is seen stepping up its tightening campaign with a supersized 100 basis point rate hike this month after a report showed inflation racing at four-decade highs.

The BSPs move was meant to support or at least stabilise the peso exchange rate, said Michael Ricafort, economist at Rizal Commercial Banking Corp in Manila.

A weak peso adds further pressure on inflation, threatening to derail recovery of the consumption-driven domestic economy.