Philippines Raises Key Interest Rate a Third Month

By Karl Lester M. Yap and Francisco Alcuaz Jr.

Aug. 28 (Bloomberg) -- The Philippine central bank raised its benchmark rate to tame inflation, saying the economy is ``strong enough'' to withstand a third increase in borrowing costs since June.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 0.25 percentage point to 6 percent, Governor Amando Tetangco told reporters in Manila today. The decision was predicted by 13 of the 15 economists surveyed by Bloomberg News, with the rest expecting a half-point increase.

``If we are able to manage inflation and manage it well, it will actually promote growth,'' Deputy Governor Diwa Guinigundo told reporters in Manila today. Philippine economic expansion is ``still above strength'' amid ``encouraging'' exports.

Philippine economic growth eased to a three-year low of 4.6 percent in the second quarter as consumer spending waned, the government said today. Countries from Indonesia to India are raising borrowing costs this year as higher commodity prices spur inflation, even as a global slowdown stifles demand for Intel Corp. computer chips and other Asia-made goods.

``If the central bank doesn't raise rates now, they run the risk of inflation becoming a heavier burden later on,'' said Yvette Marquez, who helps manage about $6.5 billion as a senior trader at BPI Asset Management in Manila. ``Better fix it now than fix it later.''

Thailand yesterday raised its benchmark interest rate for a second straight month to tame inflation, even after economic growth slowed more than estimated in the second quarter. Indonesia's central bank this month raised borrowing costs for a fourth straight meeting.

Further Increases

``Monetary policy needs to be appropriately tight to stabilize inflation'' and help manage inflation expectations, Tetangco said today. ``Fluctuations in international oil prices continue to pose a major risk to the inflation outlook.''

Still, it's ``difficult to say'' if the bank will raise rates further, Guinigundo said.

Inflation may have accelerated to as much as 12.6 percent in August from 12.2 percent in July, and may exceed the central bank's targets for 2008 and next year, Governor Tetangco said today. Bangko Sentral last month raised its 2008 inflation forecast to a range of 9 percent to 11 percent, from 7 percent to 9 percent.

``The declining trend in commodity prices should help moderate inflation pressures,'' he said. Crude oil in New York has fallen about 20 percent from a record $147.27 a barrel on July 11.

`Right Thing'

President Gloria Arroyo in May abandoned her plan to balance the budget for the first time in a decade this year, pledging to boost investment and increase subsidies to help Filipinos cope with surging prices.

``Policy makers are doing the right thing,'' said Edward Teather, an economist at UBS AG in Singapore. ``The government is making sure it encourages an environment where the economy can bounce back once the global weakness dissipates.''

Record oil and rice prices have crimped Philippine consumer spending, which makes up 70 percent of the economy. The government this month lowered its 2008 growth target for a second time this year to between 5.5 percent and 6.4 percent, which would be a slowdown from the 7.2 percent expansion in 2007.

``Achieving the full-year target will be a tough challenge,'' Economic Planning Secretary Ralph Recto said today.

The economy expanded 4.6 percent in the first half of the year, and Deputy Governor Guinigundo said full-year growth may be 5 percent.

Remittances

Still, remittances from the more than 8 million Filipinos abroad, or about a tenth of the population, have supported the $118 billion economy this year as faster inflation eroded consumer spending.

Consumer spending growth slowed to 3.4 percent in the second quarter from 5.2 percent in the previous three months. Government spending, which accounts for a tenth of the economy, fell 5.1 percent.

Exports, which make up two-fifths of the economy, added 7.7 percent from a year earlier, after a 6.1 percent drop in the first quarter. Services climbed 4.3 percent, slower than the 6.5 percent pace in the previous three months.

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