MANILA (UPDATE) - The Bangko Sentral ng Pilipinas on Thursday announced a surprise 75 basis-point hike in its benchmark rate, ahead of the scheduled monetary policy-setting meeting on Aug. 18 to tame rising inflation.

The surprise adjustment brought the overnight reverse repurchase rate, used by banks to price loans, to 3.25 percent from 2.5 percent in June. The current key policy rate is now at the same level as it was in March 2020.

For consumers and businesses, this means interest rates on loans will go up.

In a live briefing, BSP Governor Felipe Medalla said the adjustment takes effect immediately on July 14.

"In this morning’s regular meeting, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 75 basis points to 3.25 percent effective today," Medalla said.

The interest rates on the overnight deposit and lending facilities were raised to 2.75 percent and 3.75 percent, respectively, the BSP said.

So far, the BSP has raised interest rates by 125 basis points this year as the inflation rate continued to rise.

Inflation accelerated to 6.1 percent in June, above the 2 to 4 percent target range, as oil and other commodity prices continued to increase.

“By taking urgent action, the Monetary Board aims to anchor inflation expectations further and temper mounting risks to the inflation outlook in particular,” he added.

The surprise hike was BSP's “showed a bit more resolved for the central bank to combat inflation," ING Bank Manila's Senior economist Nicholas Mapa told ANC.

"With inflation expectations, this is the most crucial battle for the central bank to handle. Doing this move sort of signals to the market that we’re doing our part to anchor inflation," he said.

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Medalla meanwhile played down concerns about the rate hike's impact on economic growth by saying that the Monetary Board noted the "favorable conditions" suggest that the economy could accommodate further tightening.

BPI lead economist Jun Neri also said a 3.25 percent interest rate is unlikely to hurt the economy.

"We grew rapidly for many years with much higher policy settings," Neri said.

He added inflation uncertainties "are significantly tempered" with the rate hike.

Besides its expected impact on loan growth, the interest rate hike is also seen to shore up the peso, which has already weakened by around 10 percent versus the dollar this year.

LARGEST HIKE BY BSP

The 75 bps hike was the most aggressive increase implemented by the Monetary Board, BSP Deputy Governor Franciso Dakila said in a briefing following the announcement.

“In the direction of policy rate increase, this is the largest that the BSP has undertaken,” he said.

In August and September 2018, the BSP implemented back-to-back increases of 50 bps or a total of 100 bps to bring the policy rate to 4.5 percent, he said.

In terms of rate reduction, the BSP cut the overnight borrowing rate by 100 bps on June 23, 2016, he added.

Dakila said that the last time an off-cycle policy decision was made was in April 16, 2020 when the Monetary Board decided to cut interest rates by 50 bps to 2.75 percent.

The surprise BSP rate hike also comes ahead of the US Federal Reserve's expected aggressive rate hike later this month after the US inflation rate surged 9.1 percent.

Analysts have said that aggressive rate hikes by the Fed were partly responsible for the depreciation of the peso, as it led to the strengthening of the US dollar.