MANILA -- The Philippines' central bank on Thursday hiked rates by 50 basis points for the first time in a decade, sending a strong signal that inflation remains its top concern despite a slowdown in economic growth in the second quarter.
The Bangko Sentral ng Pilipinas increased the benchmark rate by 50 basis points to 4.0%. Cumulatively, the BSP has hiked its policy rate by 100 basis points since May, after holding steady for nearly four years.
Consumer prices reached a fresh five-year high last month, with inflation averaging 4.5% in the first seven months and breaching the central bank's 2% to 4% target for 2018. The BSP expects inflation to further accelerate in the coming months and peak in the third quarter.
BSP Governor Nestor Espenilla said raising rates more aggressively was needed to rein in supply-side inflationary pressures and strengthen the peso, which fell to a 12-year low against the dollar in July due to a widening trade deficit.
"The monetary board deemed stronger monetary action to be necessary to rein in inflation expectations," he said.
Earlier in the day, authorities announced that the Philippine economy grew 6% in the second quarter. That figure marked the lowest level in three years and well below market expectations of 6.8%. The economy grew 6.3% in the first half, which means it needs to expand by at least 7.7% in the remainder of the year to hit the low end of the government's target of 7-8%.
Some of President Rodrigo Duterte's policies took a toll on the economy in the second quarter. Socioeconomic Planning Secretary Ernesto Pernia attributed part of the slowdown on Duterte's decision to close Boracay Island to tourists for six months until October on environmental reasons. Service exports slowed to 9.6% from 16.4% on the quarter following that decision.
The closure of several mines after they failed an environmental audit and the imposition of new taxes resulted in the contraction of the sector by 10.9% from a year ago. This compared with growth of nearly a fifth in the same period last year. "All measures should ensure sustainable and long-run growth for the economy. These policy decisions were prudent and judicious," Pernia said.
Growth in household spending, the country's key economic driver, has also slowed for a second straight quarter as rising costs and higher taxes on sugary products, a part of Duterte's tax reform, discouraged spending. "Inflation would have dampened, to some extent, consumption," he said.
The BSP expects inflation to average 4.9% in 2018. Thursday's hike marks the fastest pace of tightening since 2008 when inflation hit a 17-year high.
For businesses, rising prices are a headache. SM Investments, the Philippines' largest company by market capitalization, has flagged risks related to rising consumer prices after reporting higher earnings in the first half.
The conglomerate, which is often regarded as a proxy for the Philippine economy because it is a leader in sectors such as banking, real estate and retail, said net income grew 9% to 18.1 billion pesos ($341.3 million) from January to June from a year ago. Consolidated revenues climbed 12% to 204.9 billion pesos over the same period.
"Our results show the strength of the economy and consumer sentiment but we remain vigilant about inflationary pressures," SM President Frederic DyBuncio said.
BSP Governor Espenilla said the economy is strong enough to absorb higher interest rates and will continue to grow at a sustainable pace over the medium term.
"To the extent that the economy will continuously be seen as stable as evidenced by price stability, then I would say that this is contributory to the attainment of growth targets over the medium term," Espenilla said. "To my mind, it doesn't compromise the goal of hitting the 7-8% over the medium term."
Jose Mario Cuyegkeng, senior economist at ING Bank Manila, said BSP's move will moderate inflation and address the uneven pace of expansion in the private sector with government spending.
"We believe that this is not the end of BSP's tightening as the immediate objective to anchor inflation expectations would need further action since inflation is yet to peak and would remain elevated for the rest of the year and early 2019," Cuyegkeng said.
Nikkei staff writer Cliff Venzon contributed to this article.