Philippines Raises Key Rate a Second Month to Fight Inflation

By Shamim Adam and Karl Lester M. Yap

July 17 (Bloomberg) -- The Philippine central bank raised its benchmark interest rate for a second straight meeting as rising transport and food prices threaten to stoke inflation that's already at a 14-year high.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 50 basis points to 5.75 percent, Governor Amando Tetangco told reporters in Manila today. The decision was predicted by 4 of the 20 economists surveyed by Bloomberg News, with the rest expecting a quarter percentage point increase.

Record oil and food prices have forced central banks from Vietnam to Pakistan to raise borrowing costs, even at the risk of stifling expansion as a U.S. slowdown hurts demand for exports and erodes growth in the region. Bangko Sentral, mulling a second increase in its 2008 inflation forecast, may have to raise rates higher after today's move.

``With the balance of risks shifting unequivocally to inflation, and inflation expectations starting to get unhinged, more policy-rate adjustments would be warranted,'' said Jun Trinidad, an economist at Citigroup Inc. in Manila. ``The central bank can afford to accelerate the rate tightening.''

Fuel prices have risen every week since April and rice costs have jumped 70 percent this year in the Philippines, which is the world's biggest importer of the grain and buys almost all of its oil from abroad. The government approved higher transport fares from last week to allow drivers and vehicle owners to cope with rising fuel costs.

Public Protests

Philippine consumer prices rose 11.4 percent in June from a year earlier, and the central bank revised up its 2008 inflation estimate to a range of 7 percent to 9 percent last month.

Crude reached a record $147.27 on July 11, and rice, wheat and palm oil also surged to unprecedented levels this year. That's fueled inflation across Asia and spurred public protests against price increases by Japanese fishermen, Indian truck drivers and Indonesian students. The Asian Development Bank expects inflation in the region to reach a decade-high this year.

The Bank of Thailand raised its benchmark interest rate yesterday for the first time in two years and said ``risks to inflation have risen markedly.'' Vietnam last month pushed borrowing costs to 14 percent, the highest in Asia, and Indonesia increased its key rate for a third consecutive meeting earlier this month.

In the Philippines, where a third of the 96 million population lives on less than $1 a day, surging inflation has hurt expansion and made helping the poor the government's priority. Growth was the slowest in more than a year in the first quarter, and the government has said it may lower its 2008 economic growth target for a second time.

`Tightening Bias'

Bangko Sentral officials have warned that they are inclined to raise interest rates to keep inflation contained.

``The bias is towards tightening,'' Deputy Governor Diwa Guinigundo said July 11. ``We have to make sure inflation expectations remain well anchored.''

President Gloria Arroyo, seeking to boost her approval rating that's at a two-year low, will spend 4 billion pesos ($88 million) from higher-than-expected tax collections to help poor families cope with faster inflation, her press secretary Jesus Dureza said this week. The government will also release more rice into the market to cool prices.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net