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July 18, 2008

Philippines inflation: Interest rates raised by 50 basis points
The Philippine central bank raised interest rates by 50 basis points on Thursday to fight the threat to the economy posed by surging inflation, a statement from the central bank said.

The decision pushed up the overnight borrowing rate to 5.75 percent and the overnight lending rate to 7.75 percent.

The central bank "noted that concurrent and interrelated shocks to the economy - such as the persistent surge in oil prices and spikes in commodity prices - have contributed to elevated inflation readings."

"Second-round effects have set in, as evident in the rise in core inflation," and there was a risk of inflation exceeding the targets set for 2008 and 2009, the statement added.

"For this reason, authorities believe that more decisive monetary action is necessary. Sustained high inflation can unseat inflation expectations and potentially create a repeating cycle of lingering inflation and wage pressures that could prove costly to the economy."

Inflation soared to 11.4 percent in June, the highest level in 14 years, due to rising food and energy prices. Core inflation, which excludes selected food and energy items, rose to 6.6 percent in the same month.

For the first time since 2005, the central bank began tightening its key interest rates last month, by 25 basis points, after the May inflation figure rose to 9.5 percent.

The central bank expects inflation to peak in the third quarter and to decline towards single-digit levels in 2009.

"By responding promptly to inflation risks, the (central bank) intends to reduce the risks to inflation expectations and the long-term cost to output growth from prolonged high inflation," the bank statement said Thursday.

The authorities "believe that the series of policy adjustments will help to steer inflation towards its desired path for the medium term," it said, warning that they were "prepared to take all necessary actions to address the threat of high inflation and promote price stability."

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