BSP raises interest rates anew to tame inflation

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Metro Manila (CNN Philippines, June 20) — The Bangko Sentral ng Pilipinas (BSP) raised interest rates by another 0.25 basis points to 3.5 percent from 3.25 percent over inflation concerns.

This is the second meeting in a row where the Monetary Board, the policy making arm of the BSP, announced a rate increase. It last raised rates by 0.25 basis in May to 3 percent from 2.75 percent, the first increase since September 2014. 

Inflation, which posted a new five-year high at 4.6 percent last month, remains a key factor for the board's decision to raise key rates.

"The Monetary Board noted that inflation expectations remained elevated for 2018 and that the risk of possible second-round effects from from ongoing price pressures argued for follow-through monetary policy action," the BSP said in a statement.

The BSP added that while it expects inflation to fall back within the 2 to 4 percent target in 2019, the central bank expects inflation to remain high in 2018.

"Elevated expectations for 2018 highlight the risk posed by sustainable price pressures on future wage and price outcomes. Equally important, while latest baseline forecasts have shifted lower for 2018-2019, upside risks continue to dominate the inflation outlook, even as various measures of core inflation continue to rise" the BSP said.

As for external factors, the bank noted the volatile oil prices in the international market.

Moving forward, the BSP is looking into the current volatility of the peso, which breached a 12-year low this month, and whether or not this would require further shifts in monetary policy.

Jonathan Ravelas, chief market strategist for BDO Unionbank, said that the move shows how serious the BSP is in trying to curb inflation.

"The Philippines hiked its  interest rates anew by 25bps to 3.50% Wednesday for the second-straight meeting, giving bonds and the peso some help by demonstrating policy makers have turned more serious about taming its soaring inflation," Ravelas said on Twitter.

Nomura Global Market Research, in a statement, said it expects the BSP to raise interest rates again during the Monetary Board's next meeting in August.

"Overall, BSP noted that it is ready to take further policy actions as needed. This suggests BSP has left the door open to more rate hikes, in line with our view and our conclusions from a recent discussion with (BSP) Governor Nestor Espenilla, Jr," Nomura said.

Nomura expects inflation to further rise in the coming months, which could prompt the central bank to increase key rates to 3.75 percent in August.

"Our forecast reflects our expectation that inflation will keep rising in coming months, averaging 5.1% in Q3 from 4.7% in Q2," Nomura said.

The stock market today closed with a 0.70 percent drop from the previous day, losing by almost 51 points.

The peso ended trade at P53.48 per $1, four centavos lower than Tuesday's close.