Philippine central bank delivers larger-than-expected 50 bps hike to combat inflation

MANILA, Oct 22 : The Philippine central bank raised its key policy rate by a larger-than-expected 50 basis points (bps) to 5.5 per cent on Thursday, calling it a "decisive" move to combat price pressures while saying it was ready to tighten policy more to cool inflation.

"The Monetary Board recognized the need for a strong monetary policy response to broadening price pressures and further upside risks to inflation," the Bangko Sentral ng Pilipinas (BSP) said in a statement.

The rate hike, the fourth consecutive increase, defied market expectations; all 27 economists polled by Reuters penciled in a quarter-point increase.

"Such a decisive response will make monetary policy appropriately restrictive," the BSP said. "This will contain second-round effects and firmly anchor inflation expectations."

The Philippine peso gained after the central bank delivered an outsized interest rate hike on Thursday, but later gave up those gains and drifted back towards a record low as sticky inflation and slowing growth remained key concerns.

The peso's recent record low has added to pressure on the BSP to act, with a weaker currency raising the risk of imported inflation in a country that is heavily reliant on fuel imports. The currency has plunged nearly 10 per cent since the beginning of the US-Israeli war on Iran, which sparked a rally in oil prices.

After slowing for four straight months, inflation accelerated in September, underscoring the challenge the BSP faces as it keeps monetary policy tight despite weak economic growth in the first half of the year.

The BSP kept its average inflation forecast for this year at 6.1 per cent, but raised its projection for next year to 6.0 per cent from 5.4 per cent, citing high global oil prices and the threat posed by El Nino. It expects inflation to return to its target range in 2028 and ease to 3.3 per cent.

BSP Governor Eli Remolona said policymakers had room to adjust policy given expectations that the economy would recover, supported by fiscal measures.

"We remain open to further interest rate hikes," Remolona said.

Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, expects the BSP to stand pat at its December 17 meeting after Thursday's larger-than-expected increase, but the door to further hikes remains open if core inflation stays elevated in the coming months.