Despite economic slowdown, Philippines increases rates

Manila - 6% growth in second quarter ends run of 10 consecutive quarters in which economy grew at least 6.5%

The Philippine central bank hiked its key interest rates by a decade-high 50 basis points on Thursday as it moved to curb inflation, while downplaying the impact its action would have on slowing economic growth.
The monetary authority acted hours after the government announced a 6 per cent growth in the second quarter, a sharp slowing that ended a run of 10 consecutive quarters in which the economy grew at least 6.5 per cent.
It blamed the lower-than-expected figures on policy decisions, including the shutdown of holiday island Boracay, which pumps roughly $1 billion into the nation's economy per year.
But with prices increasing at a five-year high of 5.7 per cent in July, central bank governor Nestor Espenilla said inflation was the priority, while stressing the gross domestic product growth rate was "pretty decent" and economic expansion was not at risk.
"Favourable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings," Espenilla said.
The central bank on Thursday raised its inflation forecasts to 4.9 per cent this year and 3.7 per cent in 2019, up from 4.5 per cent and 3.3 per cent respectively.
Following two 25-percentage-point rate rises earlier this year, Thursday's increase was the largest made by the Philippine central bank since July 2008, when it effected the same increase to combat double-digit inflation.
The monetary authority's overnight repurchase facility rose to 4 effective Friday, while interest rates on overnight lending and deposit facilities were also raised.
The move followed similarly aggressive steps taken by central banks in developing countries to curb the fallout from rising US interest rates and a stronger dollar.
Earlier on Thursday Manila announced slower economic growth in the second quarter, which fell well short of expectations. Forecasts in a Bloomberg News survey put growth at 6.6 per cent. "The slowdown is partly due to policy decisions undertaken that are expected to promote sustainable and resilient development," Economic Planning Secretary Ernesto Pernia said, referring to Boracay.
The island was shuttered in April for a six-month clean up on the orders of President Rodrigo Duterte, who branded the resort a "cesspool" sullied by tourism-related businesses flushing sewage into the sea.
Despite the lower-than-expected figures, the Philippines remains one of the best-performing economies in Asia behind Vietnam's 6.8 per cent and China's 6.7 per cent for the quarter.
In addition to the slower second quarter numbers, Pernia said GDP for the first three months of 2018 was also adjusted downward to 6.6 per cent, from 6.8 per cent.
He said this meant the economy only grew 6.3 per cent in the first half, well below the 7-8 per cent full-year target.
Agriculture's anaemic 0.2 per cent growth did not help, while mining also slowed due to the closure of several pits and higher mineral taxes.
"We are also gravely concerned about the almost stagnant output of the agriculture sector," Pernia said, noting a "gross deficiency in the domestic production of food" had helped fuel inflation.

• Philippines