Philippine inflation surges to highest level in 17 years

Manila: Philippine annual inflation hit a near 17-year high of 12.2 per cent in July, beating central bank and market expectations and setting the stage for a third straight rate hike later this month.

"Monetary policy will continue to be appropriately tight until we see a more benign outlook and manageable inflation expectations," Governor Amando Tetangco said in a mobile text message to reporters after the inflation data was released.

Analysts interpreted the central bank's hawkish tone as a green light for a quarter percentage point hike at the next rate-setting meeting on August 28. The monetary authority has raised borrowing costs by 75 basis points since June.

"Without a doubt, another 25 basis points hike on the cards at the August meeting," said Radhika Rao, IDEAglobal econ-omist.

Forecasts

The headline annual inflation number, which topped the central bank's forecast range of 11.2-12.0 per cent and market consensus in a Reuters poll of 11.8 per cent, was boosted by a jump in food prices after last month's Typhoon Fengshen hit supplies, particularly in the countryside.

It was the highest headline annual inflation rate since December 1991, when consumer prices rose 13.2 per cent. Annual inflation in June was 11.4 per cent.

The July data eclipsed earlier central bank projections that inflation would peak at slightly above 12 per cent in the late third quarter or early fourth quarter.

The central bank has revised its average inflation forecasts for 2008 and 2009 in two policy meetings in a row to July. It currently expects inflation to average 9 to 11 per cent this year, and six to eight per cent in 2009, from 2.8 per cent last year.

Benefiting from a drop in oil prices and the expectation of a rate rise this month, the peso firmed to 44.21 from Monday's close of 44.42 when it hit two-week lows on a rise in energy costs. The currency is down 6.6 per cent so far this year.

Focusing on weaker oil prices, yields in the secondary debt market fell around 25 basis points. Traders said inflation, while higher than expected, was not accelerating as much as previously.

Core inflation, which excludes food and energy prices, was 6.3 per cent in July from a year earlier compared with 6.6 per cent in June, its first let-up in pace since November.

But despite this moderation and the central bank's view that inflation will peak in the fourth quarter, analysts said it would continue to raise borrowing costs, partly to match similar tightening across the region and maintain its yield differential.

"I think the central bank will have to raise rates again this month; to not do so will risk weakness in the peso," said Vishnu Varathan, economist with Forecast. "Investors are building in rate hike expectations."

"After the Reserve Bank of India upped the ante, the Bank of Indonesia will also be watched."

The Indian central bank raised its key lending rate by 50 basis points last week to a seven-year high of nine per cent and increased banks' reserve requirements by 25 basis points to rein in inflation.

The Philippine central bank's key overnight borrowing rate is now 5.75 per cent after its rate increase last month brought it back to the October 2007 level.