Key rate: Philippines raises on inflation risks, Indonesia holds at record low

THE Philippine central bank increased its key interest rate for a second straight meeting and raised its inflation forecast, continuing a gradual pace of normalization while it faces a slumping currency.

On the other hand, Indonesia’s central bank held its policy rate at a record low again, opting to look through price shocks and currency weakness to continue supporting the economy.

Bangko Sentral ng Pilipinas raised the benchmark rate by 25 basis points to 2.5%, it said in a statement on Thursday, as forecast by 17 of 25 economists in a Bloomberg survey. The rest saw a half-point increase.

The peso was 0.1% lower at 54.5 per dollar as of 3:06 p.m. local time, holding near its weakest level since 2005. The benchmark stock gauge closed down 1.7% before the decision.

BSP’s rate-hike cycle is picking up momentum as inflation accelerates at its quickest in more than three years. Many policymakers in Southeast Asia have been relatively slower than other global central banks, particularly the Federal Reserve, in normalizing rates as they focus on solidifying their economic recoveries from the pandemic.  

The central bank is “prepared to take all necessary policy action” to get consumer price rises back toward its goal of 2% to 4% over the medium term, Governor Benjamin Diokno said in a briefing. The central bank raised its inflation outlook for this year to 5%, up from 4.6% last month, and flagged that inflation expectations have continued to rise.

“Despite inflation blowing past target again this year, BSP believes that the current surge in prices is largely cost-push and therefore does not warrant an aggressive rate hike cycle,” said Nicholas Mapa, an economist at ING Groep NV. The “relatively less aggressive pace of tightening” shows the need to support growth, he said.

The BSP also sees prices next year gaining 4.2%, from 3.9% earlier, before easing to 3.3% in 2024.

Incoming Governor Felipe Medalla, who will take over from Diokno on July 1, had flagged another quarter-point rate hike in August and possibly increases of similar sizes for the rest of the year. The gradual speed of policy tightening helped push the peso to its lowest against the dollar since 2005 this week.  

On its part, Bank Indonesia left the seven-day reverse repurchase rate unchanged at 3.5% on Thursday, as predicted by 24 of 33 economists surveyed by Bloomberg. The rest expected policymakers to kick off the monetary tightening cycle with a 25 basis-point hike.

The move sets Indonesia apart from most of the region’s central banks, which have begun raising borrowing costs to counter surging inflation. While domestic price gains are set to breach BI’s 2%-4% target this year, the central bank has maintained that there’s no rush to tighten as state subsidies and higher reserve requirements are helping manage price pressures.

Governor Perry Warjiyo on Thursday said inflation will continue to rise, but said it remains manageable. The monetary authority sees consumer prices returning to target next year.

Still, the extended pause leaves Indonesia’s currency vulnerable in the face of accelerated rate hikes by the Federal Reserve and European Central Bank. The rupiah has weakened amid the dollar’s strength, with the local currency losing about 4% so far this year.

The central bank said it will support the currency in line with fundamentals, and that the pressure on the rupiah was in line with regional currencies.