Philippines May Increase Interest Rate as Inflation Spurs Asian Tightening

The Philippine central bank may tighten monetary policy after inflation accelerated to a 13- month high, as Asian nations from China to India fight price gains even while growth slows.

Bangko Sentral ng Pilipinas will increase the rate it pays lenders for overnight deposits by a quarter of a percentage point to 4.75 percent, according to 10 of 16 economists surveyed by Bloomberg News ahead of a decision tomorrow. The rest expect policy makers to keep the benchmark unchanged at 4.5 percent.

Rising food and oil costs have prompted Asia’s policy makers to raise rates, order banks to set aside more money and allow further currency appreciation to contain price pressures. Governor Amando Tetangco said the central bank will consider all its tools this month, including the policy rate and reserve requirement, to combat inflation threats.

“Inflation expectations are still heightened and there is a need for monetary tightening -- if not the policy rate then the reserve requirement,” said Arthur Michael de Castro, an analyst at Bank of the Philippine Islands in Manila.

The nation’s debt rating was raised to the highest level since the start of 2005 by Moody’s Investors Service today, after the government took steps to reduce its budget deficit. It was boosted to Ba2 from Ba3, two steps below investment grade.

Stocks Rise

The Philippine Stock Exchange Index gained the most in more than two months today as the upgrade buoyed sentiment, according to data compiled by Bloomberg. The peso is up more than 6.5 percent against the dollar in the past 12 months. Benchmark three-year bond yields rose to the highest level in more than a week.

In China, the central bank ordered lenders to set aside more cash as reserves yesterday after price gains accelerated to the fastest pace in almost three years in May.

India’s wholesale-price inflation quickened to 9.06 percent last month, a report showed yesterday, adding pressure on the central bank to extend the fastest round of interest-rate increases among Asia’s major economies.

Thailand and South Korea also increased borrowing costs earlier this month. Indonesia kept rates unchanged for a fourth month last week after gains in the rupiah helped contain inflation. Most Asian currencies have climbed in 2011, partly because of foreign capital inflows seeking higher yields.

Bangko Sentral is watching capital flows that may increase liquidity in the financial markets and boost inflation, Deputy Governor Diwa Guinigundo said today.

‘All Tools’

“We have to make sure both the liquidity side and the state of interest rates in the market is consistent with our inflation and output goals,” Guinigundo said in an interview, citing the surge in inflows and about 1.6 trillion pesos ($37 billion) of cash in the central bank’s special deposit accounts. “We really need to consider all the tools” as the inflation forecast for this year “remains elevated,” he said.

Consumer prices in the Philippines climbed 4.5 percent last month from a year earlier, the biggest increase since April 2010.

“We have a number of instruments in our policy toolkit -- policy rate, reserve requirement, macro-prudential measures -- and we will consider all these” at this week’s meeting, Tetangco said on June 12. Philippine banks are required to set aside 19 percent of their deposits as reserves, a ratio the central bank reduced from 21 percent in November 2008.

Inflation Expectation

“Inflation expectations are yet to be anchored, given commodity prices remain volatile,” said Vincent Tsui, a Hong Kong-based economist at Standard Chartered Plc. “We maintain our call for Bangko Sentral to hike by 25 basis points as a pre- emptive measure to stay ahead of the curve in managing inflation expectations.”

The Philippines’ $161 billion economy expanded 4.9 percent last quarter, the smallest gain since 2009. President Benigno Aquino, who completes his first year in office this month, is aiming for growth of as much as 8 percent annually from 2011 to cut poverty. Growth in Asian nations including Malaysia, India and Vietnam also slowed in the first quarter.

Manila Electric Co., the Philippines’ biggest power retailer, said it will charge customers higher prices this month after power generation costs increased. Jollibee Foods Corp., the nation’s largest restaurant operator, said in April profit growth in the first half of 2011 may be restrained by higher raw-material prices and operating costs.

Crude oil prices have surged about 28 percent in the past 12 months after unrest in the Middle East and North Africa threatened supplies. World food prices climbed to a record earlier this year, according to the United Nations Food and Agriculture Organization.

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

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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