The Philippine central bank hiked its overnight borrowing rate by further 25 basis points to 3.5 percent, consistent with market expectations. Accordingly, the overall interest rate corridor was also hiked by a similar magnitude.
The decision to raise the interest rates came in spite of weak inflation in May. According to an ANZ research report, sustained peso weakness nudged the central bank to hike the policy rate. The Philippine central bank marginally lowered its inflation projection for 2018 to 4.5 percent from 4.6 percent. For the next year, the central bank expects consumer price inflation to average 3.3 percent, slightly below its May projection of 3.4 percent. The BSP also expects inflation to peak in the third quarter of 2018.
The central bank also stated that it is prepared to take additional policy actions. Increased crude oil prices and a possible upward revision in minimum wages were seen as the key upside risks. The significant thing to watch out would be the magnitude of wage revisions in October, stated ANZ.
The Philippine data continue to signify over-heating pressures in the economy. The trade deficit rose sharply by 59 percent year-on-year in January-April this year, signifying further deterioration in the current account. The Philippine peso has eased 6.6 percent year-to-date, which could add further to inflationary pressures.
“In our view, the central bank has kept the door open for further rate hikes. Accordingly, we will be revisiting our policy rate forecasts”, added ANZ.
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