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Philippine central bank hikes key rate for 3rd time in 2018

The Philippine central bank raised its benchmark interest rate for the third time in 2018, citing elevated inflation expectations.

Bangko Sentral ng Pilipinas increased the overnight reverse repurchase facility rate by 50 basis points to 4.0%, effective Aug. 10. The interest rates on the overnight lending and deposit facilities were also "raised accordingly," the bank said, without providing details.

The move follows a 25-basis-point hike in June, bringing the total increase to 100 basis points for this year.

The central bank forecasts inflation to reach 4.9% and 3.7% in 2018 and 2019, respectively, up from the prior projections of 4.5% and 3.3%.

Policymakers said the upwardly revised forecasts indicate "some risk of inflation exceeding the target in 2019." Headline inflation rose to 5.7% year over year in July, compared with 5.2% in June, above the government's target range of 3.0%, plus or minus 1.0 percentage point, for 2018.

"The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation, including those emanating from the ongoing normalization of monetary policy in advanced economies and its impact on the foreign exchange market, and bring inflation toward a target-consistent path over the medium term," the central bank said in a statement.

Joey Cuyegkeng, Philippines senior economist at ING, said the central bank's "hawkish actions and bias also address weakness in the peso, which has contributed to inflationary pressures."

"We expect the hawkish stance to deliver needed support for the currency, which could still come under pressure not only from a widening trade and current account deficit but also from the tightening of other major central banks," Cuyegkeng wrote in a research note.

The Philippine peso was up 0.15% against the U.S. dollar as of 5:45 a.m. ET. Year-to-date, the currency is down 5.78% against the dollar.