MANILA, Philippines – For the first time in over 3 years, the Bangko Sentral ng Pilipinas (BSP) lifted the benchmark interest rate to 3.25% in a bid to help the economy withstand rising inflation and the weakening peso.
The central bank's Monetary Board on Thursday, May 10, decided to increase the interest rate on the BSP's overnight reverse repurchase (RRP) facility by 25 basis points to 3.25%. The interest rates on the overnight lending and deposit facilities were raised accordingly.
"In deciding to raise the policy interest rate, the Monetary Board noted that latest forecasts have further shifted higher, indicating that inflation pressures could become more broad-based over the policy horizon," BSP Governor Nestor Espenilla Jr said in a statement on Thursday, May 10.
Inflation, or the movement of prices of basic goods and services, rose to another 5-year high of 4.5% in April 2018. (READ: Amid high inflation, Bangko Sentral ready to raise interest rates 'if needed')
"While inflation momentum has started to slow down, inflation may still breach the inflation target range of 2% to 4% for 2018, primarily due to temporary supply-side factors. Nevertheless, inflation is expected to return inside the target range in 2019," Espenilla said.
The BSP last raised interest rates in September 2014 – by 25 basis points. Since then, the central bank had maintained an accommodative stance through a low interest rate regime.
The BSP chief said the Board believes a timely increase in the central bank's policy interest rate will "help arrest potential second-round effects by tempering the buildup in inflation expectations."
Interest rates are charged by lenders to borrowers. When interest rates are lifted, consumers tend to save more, as returns from savings are higher. With less disposable income being spent as a result of higher interest rates, inflation decreases. (READ: How a Fed rate hike impacts the Philippine economy)
"The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country's economic growth momentum," Espenilla said.
The Philippine economy grew by 6.8% in the firstst quarter of the year, which is below the government's target of 7% to 8% for 2018.
Had inflation been lower than 4.5%, Socioeconomic Planning Secretary Ernesto Pernia said the country's economic growth in the first quarter would have been somewhere "approaching the middle" level of the government's full-year target of 7% to 8%. – Rappler.com