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Philippine Central Bank Lifts Rate By 50 Bps To Tackle Inflation

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The Philippine central bank lifted its key interest rates by 50 basis points, the biggest hike in a decade, to tackle surging inflation despite slowing growth.

The Monetary Board of the Bangko Sentral ng Pilipinas, on Thursday, raised the overnight reverse repurchase rate by 50 basis points to 4.00 percent from 3.50 percent.

Interest rates on the overnight lending and deposit facilities were also raised accordingly.

The bank has lifted its key interest rate by cumulative 100 basis points since May. The BSP had tightened the policy by raising the rate by 25 basis points each at the previous two meetings.

The board noted that latest baseline forecasts have shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019. Upside risks continue to dominate the inflation outlook, the bank said.

Although inflation expectations remain elevated, it is set to remain within the target of 2-4 percent next year, the board observed.

The bank raised its inflation forecast for 2018 to 4.9 percent from 4.5 percent and that for next year to 3.7 percent from 3.3 percent.

Policymakers deemed stronger monetary action to be necessary to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects.

Inflation rose to 5.7 percent in July, the highest in more than five years.

According to the board, the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation and bring it back towards target path over the medium term. Policymakers said the economy can accommodate a further tightening of monetary policy settings.

Meanwhile, economic growth eased to a three-year low of 6.0 percent in the second quarter from 6.6 percent rise in the first quarter, data from the Philippine Statistics Authority showed Thursday. The rate is also well below the government's target of 7-8 percent.

Economic Planning Secretary Ernesto Pernia said the economy needs to expand 7.7 percent in the second half of the year to achieve the lower end of the government target.

On a quarterly basis, GDP rose 1.3 percent in the June quarter.

Gareth Leather, an economist at Capital Economics, said further rate hikes are likely. However, with inflation set to peak soon, there are reasons to think the BSP is approaching the end of its tightening cycle.

The hawkish stance is set to deliver needed support for the currency, which could still come under pressure not only from a widening trade and current account deficit but also from the tightening of other major central banks, Joey Cuyegkeng, an economist at ING Bank noted.

The economist expects another 25 basis point rate hike in the fourth quarter and another 50 basis points in 2019.

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