Philippine Peso Has Biggest Weekly Gain Since 2001; Bonds Drop

By Lilian Karunungan

July 18 (Bloomberg) -- The Philippine peso had its best week since 2001 after the central bank yesterday raised its benchmark interest rate twice as much as economists forecast to quell inflation. Government bonds fell.

The currency gained 2.6 percent against the dollar, the most since August 2001 and Asia's best performance of the week. A record drop in crude oil costs also helped support the peso, reducing dollar demand in a nation that imports almost all of the fuel it consumes.

``The market is rewarding the central bank's hawkishness,'' said Nizam Idris, a Singapore-based currency strategist at UBS AG, the second-biggest currency trader in the world. ``The rate differential helps. For a more sustained strength in the peso, inflation numbers need to start to ease. You need to see sentiment recovering, investments recovering.''

The currency rose as high as 44.440 per dollar, the strongest level since June 26, before trading at 44.455 as of the 4:00 p.m. close in Manila, compared with 45.030 late yesterday, according to Bankers Association of the Philippines.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 0.5 percentage point to 5.75 percent, the biggest increase since 2000, after inflation accelerated to a 14-year high of 11.4 percent in June. The rate increase was predicted by four of the 20 economists surveyed by Bloomberg News, with the rest forecasting a quarter-point rise.

That widened the Philippines' rate advantage over the U.S. to 3.75 percentage points, the most since 2005.

Five-year bonds fell the most in more than two months, with the yield rising to the highest since July 2006.

Surprise Decision

``It's a knee-jerk reaction to yesterday's surprise 50- basis-point decision,'' said Virgil Esguerra, an interest-rate strategist at HSBC Holdings Plc in Hong Kong. ``Further tightening is expected. It shows that the BSP is responsive to the threat of second-round inflation.''

The yield on the 9.625 percent note due June 2013 jumped 33 basis points to 9.69 percent as of the 11:15 a.m. fixing at the Philippine Dealing & Exchange Corp. The price declined 1.2932, or 129 pesos per 10,000 pesos face amount, to 99.7286. A basis point is 0.01 percentage point.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.