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Philippines raises rates again following US hike

Central bank supports falling peso as capital outflow looms

The Philippine central bank has said it stands ready to adjust interest rates as needed. It raised its benchmark rate on Wednesday for the second month in a row.   © Reuters

MANILA -- The Philippine central bank on Wednesday raised interest rates for a second consecutive month in a bid to fight capital outflow and keep inflation in check.

At its fourth policy meeting of 2018, the Bangko Sentral ng Pilipinas lifted its bench mark overnight lending rate by 25 basis points to 3.5%. Last month the BSP raised the rate after nearly four years of keeping monetary policy constant.

Inflation hit 4.6% in May, its highest level for five years, prompting officials to take the unusual step of holding a news conference to address related concerns. The figure averaged 4.1% over the first five months of the year, above the central bank's target range of 2% to 4%.

The interest-rate increase is expected to support the peso, which has been trading at its lowest levels against the dollar in 12 years. President Rodrigo Duterte's large-scale infrastructure program has been driving imports and widening the country's current account deficit.

The latest round of tightening comes after a series of rate hikes by the U.S. Federal Reserve and the European Central Bank's announcement of its intention to end quantitative easing by the year end.

The Fed raised interest rates on June 13 from 1.75% to 2%, following a 25-basis-point hike in March. Fed Chairman Jerome Powell said an acceleration of rate hikes was being considered. The U.S. central bank has projected two more quarter-point increases this year.

The Fed's tone has prompted an outflow of funds from emerging markets. The trend has accelerated recently as foreign investors flocked to safety in the face of the escalating U.S.-China trade spat, the Institute of International Finance said.

After announcing a new 25% tariff on $50 billion worth of Chinese goods on Friday, U.S. President Donald Trump on Monday directed U.S. Trade Representative Robert Lighthizer to identify another $200 billion of Chinese exports to be considered for tariffs of 10%.

China has said it will retaliate with measures of "the same scale and intensity" on American goods.

According to the IIF, emerging markets have seen outflow of over $5.5 billion since flows turned negative on June 12. "Outflows were concentrated in Asia," the institute said.

The Fed raised rates just once in 2015 and 2016 and three times in 2017. Until recently, Asia had proved resilient to U.S. rate hikes, with a number of regional economies continuing to attract investment. However, with the U.S. central bank projecting further increases, coupled with fear over trade tensions, many investors are now finding dollar-denominated assets more alluring.

Other Asian central banks are also being proactive. Bank Indonesia Gov. Perry Warjiyo said on Tuesday that another rate hike was being considered to meet external pressure on the rupiah.

"Bank Indonesia is ready to launch a pre-emptive, front loading and ahead-of-the-curve policy," the newly appointed governor said. "A further step could be raising the interest rate."

Indonesia's central bank has raised its key policy rate to protect the currency twice this year. The bank is scheduled to hold its next policy-setting meeting on June 27 and 28.

"BI and BSP are in stabilization mode," said Jose Mario Cuyegkeng, senior economist at ING Bank N.V. Manila. The rupiah's and peso's weaknesses, he said, have been aggravated by growing trade tensions between the U.S. and China.

"Concerns over higher financing costs for emerging markets and reversal of portfolio flows have potential knock-on effects not only on inflation but also on financial markets and financial system," Cuyegkeng said.

Earlier in June, the Reserve Bank of India hiked its lending rates to banks for the first time in four years, citing rising oil prices.

In contrast, the Thai authorities appear more relaxed about the changing investment environment. On Monday, Finance Minister Apisak Tantivorawong said he saw "no reasons" for Thailand to raise interest rates now, and that a weaker baht was good for the country's economy. The baht hit its lowest level against the dollar for 2018 on Tuesday.

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