Philippines May Raise Interest Rates Further, Tetangco Says

By Karl Lester M. Yap and Francisco Alcuaz Jr.

July 23 (Bloomberg) -- The Philippine central bank, which last week raised its benchmark interest rate for the second straight month, may increase borrowing costs further as inflation intensifies.

``Given the current inflation environment and given the risk to the outlook, interest rate hikes cannot be ruled out at this point,'' Governor Amando Tetangco said in Manila today.

Since Bangko Sentral ng Pilipinas raised its key rate to 5.75 percent on July 17, officials have voiced concern that second-round inflation, where gains in fuel and food costs spread to other goods and services, will push up prices. The bank will ``respond quickly and decisively to second-round effects,'' Deputy Governor Diwa Guinigundo said today.

``With inflation as high as it is now, they have to take a more hawkish stance,'' said Luz Lorenzo, economist at ATR-KimEng Securities Inc. in Manila. ``If inflation gets out of hand and you see it spiraling, then you're going to have to apply much stronger medicine than if you had anchored it earlier.''

Bangko Sentral last week increased its average inflation forecast to a range of 9 percent to 11 percent this year, from a previous prediction of 7 percent to 9 percent, citing higher food, energy and transportation costs and the weaker peso, which makes imports more expensive.

Asian central banks need ``decisive tightening of monetary policies'' to combat inflation, the Asian Development Bank said yesterday. Bank of Japan Governor Masaaki Shirakawa said last week that major central banks share the view they need to raise borrowing costs should they observe the risk of second-round inflation.

The Philippine central bank raised interest rates for the first time in more than two years on June 5. Inflation accelerated to 11.4 percent that month, the fastest in 14 years.

Inflation may accelerate to 12 percent by October, the fastest since February 1994, and remain above 10 percent through the first quarter of next year, Tetangco said today. He said the latest data had shown ``stronger signs of second-round effects.''

``Our eye is on inflation because price stability is critical to sustaining growth,'' Tetangco said.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Francisco Alcuaz Jr. in Manila at falcuaz@bloomberg.net