It is the first rate hike by Bangko Sentral ng Pilipinas (BSP) since September 2014 and the first change in rates since June 2016 when the central bank adopted an interest corridor system that shifted the policy rate to 3.0 percent from 4.0 percent.
The rate hike confirms the gradual tightening of monetary policy worldwide in response to rising inflation from higher oil prices and solid economic growth. The Philippines is the fourth Asian country to tighten policy following South Korea last year, and Malaysia and Singapore this year.
The rate hike was well-telegraphed by BSP officials and follows accelerating inflation in the last four months and data today that showed annual economic growth of 6.8 percent in the first quarter of this year, up from 6.5 percent in the fourth quarter last year.
"The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country's economic growth momentum," BSP said.
In April headline inflation in the Philippines rose to 4.5 percent from 4.3 percent in March under the new base year of 2012, and above the BSP's target of 3.0 percent, plus/minus 1 percentage point. Under the previous 2006 CPI basket, inflation in April was 5.1 percent, up from 4.8 percent.
In March the central bank forecast inflation under the new base year would average 3.9 percent in 2018 and then ease to 3.0 percent in 2019.
"In deciding to raise the policy interest rate, the Monetary Board noted that latest forecasts have further shifted higher, indicating that inflation pressures could become more broad-based over the policy horizon," BSP said.
BSP said inflation momentum had started to slow but inflation is still expected to breach its 2018 target range due to temporary supply-side factors and then return to its target in 2019.
However, BSP said the balance of risks continue to lean to the upside, with price pressures from possible changes to transport fares, utility rates and wages.
The Philippine peso fell slightly in response to the rate hike and was trading at 52.0 to the U.S. dollar, down 3.8 percent this year.
BSP said inflation momentum had started to slow but inflation is still expected to breach its 2018 target range due to temporary supply-side factors and then return to its target in 2019.
However, BSP said the balance of risks continue to lean to the upside, with price pressures from possible changes to transport fares, utility rates and wages.
The Philippine peso fell slightly in response to the rate hike and was trading at 52.0 to the U.S. dollar, down 3.8 percent this year.
Bangko Sentral ng Pilipinas released the following statement:
"At its meeting on monetary policy today, the Monetary Board decided to increase the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 3.25 percent. The interest rates on the overnight lending and deposit facilities were likewise raised accordingly.
In deciding to raise the policy interest rate, the Monetary Board noted that latest forecasts have further shifted higher, indicating that inflation pressures could become more broad-based over the policy horizon. While inflation momentum has started to slow down, inflation may still breach the inflation target range of 3.0 percent ± 1.0 percentage point for 2018 due primarily to temporary supply-side factors. Nevertheless, inflation is expected to return inside the target range in 2019. The Monetary Board assessed that the balance of risks to the inflation outlook continues to lean toward the upside, with price pressures emanating from possible adjustments in transport fares, utility rates, and wages.
Given these considerations, the Monetary Board believes that a timely increase in the BSP’s policy interest rate will help arrest potential second-round effects by tempering the buildup in inflation expectations. The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country’s economic growth momentum. In assessing the stance of monetary policy, the Monetary Board also emphasizes that it continues to closely monitor domestic macroeconomic conditions as well as the evolving global economic environment, including the potential impact of the ongoing normalization of monetary policy in some advanced economies.
Looking ahead, the BSP stands ready to undertake further policy action as necessary to ensure the achievement of its price and financial stability objectives."
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