November 15, 2018 / 9:03 AM / a month ago

UPDATE 2-Philippines hikes rates again to cool prices, tightening may be over

* Fifth rate hike this year, analysts were split on a move

* Peso firms vs dollar

* Economists see tightening phase ending

* Non-monetary measures needed to halt supply-side inflation

* Inflation to return within 2-4 pct target in 2019-2020 (Adds details, economist’s comment)

By Karen Lema and Enrico Dela Cruz

MANILA, Nov 15 (Reuters) - The Philippine central bank raised its benchmark interest rate for the fifth straight time on Thursday in a bid to tackle elevated inflation and bring it back to within its target range next year.

The central bank has now lifted borrowing costs by 175 basis points (bps) this year to tackle stubborn price pressures, but is forecasting inflation will ease next year, suggesting its current tightening cycle may be at an end.

The Monetary Board raised the rate on its overnight reverse repurchase facility by 25 bps to 4.75 percent. The move followed four successive hikes since May, including back-to-back 50 bps increases in September and August.

The rates on the overnight lending and deposit facilities were also raised by 25 bps.

Seven of 13 analysts in a Reuters poll had correctly predicted Thursday’s decision by the board, while the other six had expected it to stand pat as higher financing costs were starting to dampen economic growth.

“The Monetary Board deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook,” the central bank said, adding that those risks included uncertainty about China-U.S. trade tensions and tighter global financial conditions.

“Nevertheless, the Monetary Board continues to emphasize the need for follow-through non-monetary measures to mitigate the impact of supply-side factors on inflation,” it added.

The central bank forecast inflation would return to its 2-4 percent target range next year. It raised its average inflation forecast for 2018 to 5.3 percent from 5.2 percent, but trimmed its forecast for 2019 to 3.5 percent from 4.3 percent.

Average inflation is seen at 3.3 percent in 2020.

The 2019 forecast was lowered due to the Senate’s approval on Tuesday of legislation liberalising rice imports, as well as a suspension of a new round of excise tax increases for fuel that were set to take effect in January, according to Cyd Tuano Amador, a deputy central bank governor.

Tempered inflation next year could signal Thursday’s rate hike will be the last for some time, analysts said.

“With inflation set to fall back over the coming months, we think this could mark the end of the tightening cycle,” said Alex Holmes, economist at Capital Economics Asia.

He said that could renewed pressure on the peso which has recovered some ground since hitting a 13-year low against the U.S. dollar in late September.

The peso firmed against the dollar on Thursday after the rate decision, but has lost more than 6 percent of its value this year.

Bank of the Philippine Islands economist Emilio Neri also said Thursday’s less aggressive hike could mean the central bank was winding down its tightening.

The Philippine hike came minutes after Indonesia’s central bank raised its benchmark interest rate for the sixth time this year as it tries to reduce pressure on its rupiah currency from the country’s yawning current account deficit.

Both central banks said they were also taking into account the likelihood that the U.S. Federal Reserve would raise interest rates again in December.

Steady hikes by the U.S. central bank this year and the prospect of more to come have boosted the dollar, triggering an investor exodus from emerging market currencies, stocks and bonds.

Philippine annual headline inflation was unchanged for the first time this year in October, but last month’s 6.7 percent rate was still the fastest since 2009.

Despite the apparent steadying, some analysts believed the central bank was keen to head off so-called second-round inflation effects where initial price rises ripple through to other parts of the economy.

Elevated consumer prices have curbed demand, prompting the Philippines to trim its 2018 gross domestic product growth target to 6.5-6.9 percent from 7-8 percent. Third quarter GDP rose 6.1 percent, its slowest pace in three years.

Reporting by Karen Lema and Enrico dela Cruz; Writing by Neil Jerome Morales; Editing by Martin Petty and Kim Coghill

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