MANILA: The Philippine central bank raised its key interest rate for the first time since 2018 to combat South-East Asia’s second-fastest inflation.

Bangko Sentral ng Pilipinas (BSP) increased the benchmark rate by 25 basis points to 2.25%, it said in a statement yesterday, as forecast by 14 of 21 economists in a Bloomberg survey. The rest forecast no change.

The Philippines is the latest in Asia to tighten policy settings after India and Malaysia unexpectedly raised borrowing costs this month to battle price pressures.

Faster inflation fanned by the war in Europe and supply disruptions from virus lockdowns in China risk denting consumption demand, and in turn the global economic recovery from the pandemic.

Governor Benjamin Diokno termed the increase “timely” and one that will help arrest second-round effects.

“The pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes, ” he said.

Consumer prices are currently at 4.9% - the second-fastest rate in South-East Asia and well above the central bank’s 2% to 4% target band.

Diokno also announced shifting the pandemic-era bond buying window to a regular facility to manage money supply. BSP’s loan to the government will also be fully paid this week, ahead of its maturity next month, he said.

The peso gained as much as 0.3% to 52.30 per dollar yesterday, the sole gainer among emerging Asian currencies. The nation’s benchmark stocks index fell 1% at close before the rate decision.

“The move was expected,” said Nicholas Mapa, economist at ING Groep NV in Manila. “The bigger development was the quick walk back of pandemic support with BSP closing the provisional advance and tweaking the bond purchase window.”

With the economy outperforming in the first quarter, calls have been growing for the BSP to act faster to keep inflation from denting a recovery in demand.

Pandemic restrictions in China, the Philippines’ top trading partner, risks further fanning price gains.

“Robust economic recovery and improving labour market conditions may lead to broadening inflationary pressures,” said Jonathan Koh, economist at Standard Chartered Plc in Singapore.

 - Bloomberg