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Financial News: Philippine CB Raises Key Rate For First Time

Philippine CB Raises Key Rate For First Time Since 2014

05/10/2018 - 09:47:00 (RTTNews)

(RTTNews) - The Philippine central bank raised its benchmark interest rate from a record low for the first time in nearly four years, in a bid to rein in inflation.

The Monetary Board of the Bangko Sentral ng Pilipinas, led by Governor Nestor Espenilla, on Thursday raised the key interest rate, which is the overnight reverse repurchase rate, by 25 basis points to 3.25 percent. The interest rates on the overnight lending and deposit facilities were likewise raised accordingly, the bank said in a statement. The hike was in line with economists' expectations and was the first since September 2014. The central bank had reduced the reverse repurchase rate to 3 percent from 4 percent when it shifted to an interest rate corridor system in June, 2016. That reduction was viewed as a procedural move. "The Monetary Board noted that latest forecasts have further shifted higher, indicating that inflation pressures could become more broad-based over the policy horizon," the BSP said in a statement on Thursday. Headline inflation accelerated to a three-year high of 4.5 percent in April from 4.3 percent in March.

"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," the bank said.

"Nevertheless, inflation is expected to return inside the target range in 2019."

The balance of risks to the inflation outlook continues to lean toward the upside, the policymakers judged. They expect price pressures to emanate from possible adjustments in transport fares, utility rates, and wages.

Lower income tax rates and a hike in the fuel duty and levies on consumer goods that are part of President Rodrigo Duterte's tax reform plans are partly to blame for the rising inflation. Capital Economics expects inflation to peak soon and then ease back. "If headline inflation does start to drop back over the coming months, then today's rate hike is unlikely to mark the start of an aggressive tightening cycle," the firm's economist Gareth Leather said. "Our view is that the BSP will raise interest rates once more this year, probably at its next meeting in late June," Leather added. Central banks in emerging markets are raising rates as the US Fed keeps going with its tapering or gradual tightening. In Asia, Malaysia's central bank hiked its key interest rate for the first time in more than three years in January. The Monetary Policy Committee of Bank Negara Malaysia decided to raise the overnight policy rate by 25 basis points to 3.25 percent.

Singapore tightened its monetary policy in April, signaling an appreciation in the Singapore dollar going forward. The Bank of Korea raised its key rate in November, which was the first hike in nearly six years. Official data released earlier on Thursday showed that the Philippine gross domestic product advanced 6.8 percent year-over-year in the first quarter, faster than the 6.5 percent rise in the fourth quarter. Manufacturing, other services, and trade were the main drivers of growth for the March quarter.

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