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Philippine Peso Gains, Bonds Drop as Inflation Fuels Rate Bets

The Philippine peso reversed earlier losses and government bonds fell after a report showing inflation in May was the fastest since 2011 fueled speculation the central bank will raise interest rates.

Consumer prices rose 4.5 percent from a year earlier, the statistics office in Manila said today, more than April’s 4.1 percent increase in April and the 4.2 percent median estimate in a Bloomberg survey. While inflation remains manageable, “room to keep rates steady has narrowed,” Bangko Sentral ng Pilipinas Governor Amando Tetangco said in a mobile-phone text message after the report.

The peso gained 0.2 percent to 43.81 per dollar in Manila, erasing an earlier loss of 0.1 percent, data from Tullett Prebon Plc show. The currency has advanced 1.3 percent this year.

“The Philippine peso is being supported by the hawkish remarks,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in an e-mailed note. “Odds of a rate hike on June 19 now seem higher, although the central bank may wait one month longer given recent growth slowdown.”

The central bank, which next meets on June 19, has kept its overnight borrowing rate at a record low of 3.5 percent since October 2012 to support growth even as inflation has exceeded the policy rate since December. It raised lenders’ reserve requirements twice this year.

Slower Growth

Philippine economic growth in the three months ended March slipped below 6 percent for the first time in nine quarters, official data showed last week. Gross domestic product increased 5.7 percent from a year earlier compared with the 6.4 percent median estimate in a Bloomberg survey of analysts.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, increased three basis points, or 0.03 percentage point, to 4.98 percent.

Three-year government bonds dropped after a two-day advance. The yield on the benchmark 2.875 percent notes due May 2017 rose three basis points to 2.94 percent, according to the noon fixing from the Philippine Dealing & Exchange Corp.

Policy makers will probably raise the benchmark rate as early as this month, Rahul Bajoria, Singapore-based economist at Barclays Plc, wrote in a report. The U.K. lender sees a total increase of 50 basis points by the end of this year.

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