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August 6, 2008

Philippine inflation soars to almost 17-yr high

Philippine annual inflation in July nearly hit a 17-year high of 12.2 percent, resulting in an expectation that the central bank would stage the third straight rate hike later this month, reported Reuters on Tuesday.

Reuters quoted the central bank’s governor Amando Tetangco as saying in a mobile text message, “Monetary policy will continue to be appropriately tight until we see a more benign outlook and manageable inflation expectations.”

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 Aug. 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 economist.

The headline annual inflation number, which topped the central bank’s forecast range of 11.2-12.0 percent and market consensus in a Reuters poll of 11.8 percent, 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 percent. Annual inflation in June was 11.4 percent.

The July data eclipsed earlier central bank projections that inflation would peak at slightly above 12 percent 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 percent this year, and 6 to 8 percent in 2009, from 2.8 percent 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 percent 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 percent in July from a year earlier compared with 6.6 percent 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.

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

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