Philippines Raises Benchmark Rate for 1st Time in 3 Years

The Philippines raised its benchmark interest rate for the first time since May 2011, guarding against inflation risks even as economic growth slowed.

Bangko Sentral ng Pilipinas raised the rate it pays lenders for overnight deposits to 3.75 percent from a record-low 3.5 percent, according to a statement in Manila today. Fourteen of 19 economists surveyed by Bloomberg News predicted the decision, with the rest forecasting no change.

The Philippines joins Malaysia (MAOPRATE) this month in increasing interest rates as Asian policy makers take steps to restrain price pressure. The Philippine central bank’s inflation target for next year may be at risk, and today’s action is a preemptive measure to arrest any second-round effects, Governor Amando Tetangco said.

“The rate increase should help to anchor inflationary expectations and moderate price pressures,” said Jeff Ng, a Singapore-based economist at Standard Chartered Plc. “Inflation has surged recently; if it continues the momentum seen in the past 3 months, it will overshoot the inflation target next year,” he said, adding that BSP may raise the benchmark rate by a further 25 basis points by year-end.

The peso fell 0.1 percent at the close to 43.46 against the U.S. dollar before the decision. It has gained about 2.6 percent in the past three months, the biggest advance among 11 Asian currencies tracked by Bloomberg. The benchmark stock index was little changed at the close.

Forecast Raised

The monetary authority today kept the rate on special deposit accounts at 2.25 percent and left the reserve requirement ratio unchanged at 20 percent.

Inflation more than doubled in less than a year to 4.4 percent in June, boosted by higher costs of food including rice. Food prices surged 7.4 percent in June from a year earlier, the fastest pace since 2009.

The central bank today lowered its forecast for price gains this year to 4.33 percent from 4.4 percent and raised next year’s estimate to 3.72 percent from 3.65 percent, citing costs of oil, food and power as risks. The inflation target for this year is “safe,” and the rate hike is a preemptive move for 2015, Deputy Governor Diwa Guinigundo said at a briefing.

It is to “send a signal to the market that the BSP is serious in its commitment to price stability,” Guinigundo said. “The shocks could come mostly from the supply side, but could spill over to the demand side and that is something monetary policy has to respond to.”

Growth Slowed

Philippine gross domestic product increased 5.7 percent in the three months through March from a year earlier, the weakest pace since 2011. President Benigno Aquino yesterday asked lawmakers to approve a record budget for next year, and is seeking more than $20 billion of investment in roads and airports to bolster growth to as much as 7.5 percent this year.

The central bank will consider second-quarter GDP data at its next meeting in September to gauge whether the economy is “strong enough to accommodate normalization of monetary policy,” Guinigundo said. GDP data are due Aug. 28.

Money supply rose 23 percent in June from a year ago, the slowest pace in a year, while net bank lending eased from a month earlier, data showed today. The monetary authority raised the rate on special deposit accounts at its previous meeting in June, and has increased the reserve requirement ratio twice this year to curb liquidity.

“The underlying health of the economy is quite strong and it’s in a fairly good position to withstand future rate hikes, as long as these are not overly aggressive,” said Gareth Leather, a London-based analyst at Capital Economics Ltd. “I expect to see more policy rate increases, probably another 50 basis points before the end of the year.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Rina Chandran, Clarissa Batino

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