Philippine central bank hikes interest rate by 50 bps, likely to hike further in September

The Philippine central bank hiked its overnight reverse repurchase policy rate today by 50 basis points to 4 percent, consistent with consensus expectations. Accordingly, the overall interest rate corridor was also hiked by a similar magnitude.

The BSP also hiked its inflation forecasts considerably. The central bank raised 2018 and 2019 forecasts for the consumer price inflation to 4.9 percent and 3.7 percent, respectively, from 4.5 percent and 3.3 percent. The upward revision to the next year’s forecast is significant in that it comes on top of a higher base. The central bank also provided its 2020 inflation projection at 3.2 percent.

In its press statement, the BSP underlined that the rise in transportation costs, upward revision in taxes, and a positive base effect were the main reasons for the revisions in the inflation projection for this year. The central bank was of the view that the price pressures in the economy are widening whereas inflation expectations are high, noted ANZ Bank in a research report.

In spite of a below expected second quarter GDP print of 6 percent, the BSP continued to be confidence on growth and the ability of the economy to absorb higher interest rates. Also, the Philippines’ domestic demand conditions continue to be solid with the slowdown in second quarter GDP growth linked to a reduced contribution from net trade.

“We believe that the central bank has kept the door appropriately open for further rate hikes. We now expect it to hike by a further 25bps to 4.25 percent at its September policy meeting. This would take the cumulative rate hikes in the current cycle to 125bps”, added ANZ.