MANILA: The Philippine central bank raised key interest rates by 50 basis points on Thursday, the most in a decade, and left the door open for further policy tightening to fight inflation despite economic growth losing steam.
As widely expected, the central bank's policymaking Monetary Board raised the overnight borrowing rate to 4%. The rates on the overnight lending and deposit facilities were raised by the same magnitude.
The hike was the central bank's most aggressive since the global financial crisis in 2008, and many analysts expect more rate increases.
After Thursday's move, the peso erased losses from disappointing second-quarter growth data, briefly rising 0.1% against the dollar, before settling a tad weaker.
Bangko Sentral ng Pilipinas governor Nestor Espenilla said inflation expectations remained "elevated", with monetary authorities raising inflation forecasts for this year and next.
"For these reasons, the Monetary Board deemed stronger monetary action to be necessary to rein in inflation expectations," Mr Espenilla told a news conference.
"The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation."
The rate increase is the third since May and made the Philippine central bank the second Southeast Asian one, after Indonesia, to hike at three consecutive policy meetings this year, by a total of 100 basis points.
Battling capital outflows
Both countries are seeking to prop up weak currencies, as interest rate increases in the US and their current account deficits have caused them to be hit by capital outflows. And both are worried that the US-China trade war could exacerbate economic problems.
But the Philippines, unlike Indonesia, is battling inflation, which in July shot up to an annual 5.7%, its highest level in more than five years.
"The BSP reiterates its strong commitment and readiness to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability," Mr Espenilla said.
The BSP raised its average inflation forecasts to 4.9% for this year and 3.7% for 2019, from 4.5% and 3.3%, respectively.
The central bank's announcements came hours after the government said the economy grew 6% in April-June, the slowest pace in almost three years. A Reuters poll had expected growth of 6.7%.
"The BSP delivered a strong message but the market has priced it in already," said Jonathan Ravelas, market strategist at BDO Unibank in Manila, who is looking at another 25 bps hike in the fourth quarter.