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Philippines raises interest rates for fourth time in 2018

Philippines raises interest rates for fourth time in 2018

The Philippines' central bank increased key interest rates on Thursday as it continues its attempts to rein in inflation and buttress a slumping currency.

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By Jay Banerjee 28.09.2018

The Philippines’ central bank increased key interest rates on Thursday as it continues its attempts to rein in inflation and buttress a slumping currency. This is the fourth time that the bank has intervened to hike rates in 2018 alone following the US Federal Reserve’s third increase of the year in mid-week.

The Bangko Sentral ng Pilipinas opted for a bigger rise than the Fed, however, with a 50-basis point rise to 4.5% aimed at combating an overheating economy. There are concerns that inflation and consumer prices could soon spiral out of control.

Inflation recently soared to a nine-year high in August, while consumer prices rose to 6.4%, another unprecedented increase for the 2010s. Analysts believe that the situation could become more volatile during the next few months, with forecasts for September now exceeding 7%.

The central bank has now decided to intervene for the fourth time in just nine months. It said: "The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures.” The bank also expects inflation to top the monetary authority’s forecast for the full year and 2019.

The recent Typhoon Mangkhut has also affected the economic situation by wreaking destruction across the region. The natural disaster is likely to lead to a further increase in prices, as key agricultural areas are still struggling to produce goods due to significant damage.

Rising prices coupled with rice supply shortages are set to inflame tensions among the general populace and could soon become a pressing political issue for President of the Philippines Rodrigo Duterte. The latest increases have hit the nation’s poor the hardest, as the estimated 25 million people on low incomes are now struggling to make ends meet.

The central bank has sanctioned key rates rises to the tune of 150 basis points since May, and it said that the latest uptick was necessary to mitigate risks associated with inflation, which includes the volatility of exchange rates. The Philippine peso has slumped in recent months and is hovering around lows not seen since 2005. It inched lower to just 54.12 pesos against the US dollar on Thursday.

While the central bank has made moves to tackle inflation, it also wants the Duterte government to roll out policies and measures that will aid the cause. Improving the supply chain for rice may ease tensions, and this is achievable by lifting import quotas.

Harry Roque, a spokesperson for Duterte, said that there are plans for new measures to keep inflation in check, including revised import controls for food products that were previously protected. “Right now, the foremost priority of the administration is fighting inflation. So, everything is sidelined now," Roque said on Thursday.

While the Philippines opted for a rate hike, China’s central bank continued with the same short-term rates on Thursday despite mounting pressure on the yuan. The People’s Bank of China (PBOC) said that “relatively high” liquidity levels had played a role in its decision to leave rates steady. Analysts had also expected this move.

This highlights how the US and China, the world’s two largest economies, are pursuing different policy paths as their trade war rumbles on. The Federal Reserve had to act on Wednesday, as the US economy is growing at a faster rate than expected, while China is facing a cooling economy and additional pressure from its trade standoff.

“There is no regular monetary policy meeting in China, and hence, it can adjust rates any time. Skipping OMO today per se does not have an implication on future rates move," Westpac’s Head of Macro Strategy for Asia, Frances Cheung, said. “That said, this time round, there is minimal pressure for the PBOC to hike OMO rates given the narrow spreads with market rates."

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