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Philippines Monetary Policy August 2018

Philippines: Central Bank hikes rates for the third consecutive time as inflationary pressures mount

At its meeting held on 9 August, the Central Bank of the Philippines (BSP) decided to raise the overnight reverse repurchase facility (RRP) by 50 basis points, from 3.50% to 4.00%. The decision, which was expected by market analysts, represented the third interest rate hike since September 2014 and the steepest increase so far this year. The Bank also hiked the overnight lending facility (OLF) and the overnight deposit facility (ODF) rates by 50 basis points each, which now stand at 4.50% and 3.50%, respectively. The ODF establishes the floor, whereas the OLF establishes the ceiling of the interest rate corridor system.

The latest Bank decision came against a backdrop of elevated and rising inflationary pressures. Indeed, in a press conference following the BSP meeting, Governor Nestor Espenilla Jr declared that “latest baseline forecasts have shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019. Upside risks also continue to dominate the inflation outlook, as the sustained increase in core inflation suggests broadening price pressures amid resilient aggregate demand conditions”.

Indeed, inflation rapidly accelerated in recent months, reaching a near decade-high of 5.7% in July (June : +5.2%), thanks to a depreciating currency, higher oil and commodity prices, and fiscal stimulus since late 2017. With robust domestic momentum expected to continue in coming quarters, the BSP deemed that this third rate hike of the year would help rein in inflationary pressures and balance the ongoing monetary policy normalization in advanced economies—most notably by the U.S. Federal Reserve—which has impacted foreign exchange markets and contributed to commodity price swings. Overall, the communiqué from the BSP struck a hawkish tone, and the Bank reaffirmed its commitment to “take all necessary policy actions” to ensure macroeconomic stability and anchoring inflation. This signals that further interest rate hikes this year cannot be ruled out yet, although the BSP will likely wait for the impacts of its previous rate hikes to fully materialize before undertaking a new policy change.

The next monetary policy meeting will be held on 27 September.

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