Manila : Philippine economic growth unexpectedly accelerated last quarter to the fastest pace in three years as consumer and government spending increased. Stocks and the peso rose.

Gross domestic product increased 7.9 per cent from a year earlier, compared with a revised 7.8 per cent gain in the three months through March, the National Statistical Coordination Board said in Manila yesterday.

That's more than the 6.3 per cent median forecast of 14 economists surveyed by Bloomberg News, and is the fastest pace since the second quarter of 2007.

The Philippine economy has shown more resilience than neighbours including Malaysia and Thailand, where growth is slowing as faltering recoveries in the US and Europe threaten exports.

Bangko Sentral ng Pilipinas will review the impact of faster growth on its inflation forecasts, Governor Amando Tetangco said.

"The Philippines is enjoying a sweet spot," said Rafael Algarra, treasurer at Security Bank Corp in Manila. "Growth is quite good while inflation is still quite low and that should be positive for our assets. The peso has room to strengthen."

The Philippine benchmark stock index jumped the most in seven weeks and four-year bond yields slid to a record-low. The peso rose, extending its gains this year to more than 2 per cent.

Full-year growth may exceed the government's 5 per cent to 6 per cent goal, Economic Planning Secretary Cayetano Paderanga said today. The budget deficit this year may be smaller than the record 325 billion-peso ($7.2 billion) government forecast as faster expansion may boost revenue, he said.

Inflation held at a seven-month low in July and the central bank has said it expects price gains to be within its targets for this year and next.

"Growth factors such as inventory restocking and exports have a big chance of wearing off in the second half," Emilio Neri, an economist at Bank of the Philippine Islands in Manila, said before the GDP report. "We see a very low risk of the central bank hiking this year as growth has proven to still not be inflationary."

A faltering global recovery and the killing of tourists in a bus hijacking this week may hamper Philippine President Benigno Aquino's pledge to attract investments and create jobs to cut poverty.

Global risks

Weaker-than-estimated economic growth in Japan and the US and slower expansion in China are adding to signs that the global rebound is losing momentum. Philippine export growth eased in the second quarter after exceeding 40 per cent in the previous three months.

Former police inspector Rolando Mendoza seized a bus carrying 25 people on August 23 to protest his dismissal on extortion charges, leading to the deadliest attack on visitors in Philippine history. Eight tourists from Hong Kong died, casting a shadow on the government's plan to double the size of the tourism industry, Aquino said, and Finance Secretary Cesar Purisima said it will probably hurt tourist arrivals.

Aquino, who took office in June, plans to increase government spending to a record next year to expand the economy by 7 per cent to 8 per cent annually from 2011 after growth slid to an 11-year low of 1.1 per cent in 2009. He's seeking to boost incomes in a nation where the World Bank estimates one out of four people live on less than $1.25 a day.

The hostage crisis won't affect Philippine monetary policy, as its impact on the markets won't be "significant," Tetangco said this week.

"We will update our forecasts to incorporate this new information and consider its impact on the forecast inflation path over the policy horizon," he said after the GDP report yesterday.

The central bank cut the benchmark interest rate last year to the lowest level since central bank data started in 1990 to shield the nation from the global recession.

record low

Interest rate at 4%

The Philippine central bank kept its benchmark interest rate at a record low as easing inflation gives it room to support the nation's economic recovery.

Bangko Sentral ng Pilipinas left the rate it pays lenders for overnight deposits at 4 per cent for a 10th meeting, it said in a statement in Manila yesterday. That's the lowest level since central bank data started in 1990. The decision was expected by all 15 economists surveyed by Bloomberg News.

Easing inflation has allowed Bangko Sentral to keep its key rate unchanged for more than a year, helping economic growth accelerate to a three-year high last quarter. The Philippines has refrained from joining neighbors including Malaysia and India as Asia's policy makers balance the need to sustain growth against the threats of inflation and asset bubbles.

"Given that inflation is muted, there is still leeway for the central bank to keep rates unchanged," said Angeline Sia, who helps manage the equivalent of about $11 billion at BPI Asset Management in Manila. "People remain cautious about slowing growth in the advanced economies such as the U.S. and Europe."