August inflation rises to 7.2%; BSP may hike rates

The country’s inflation rate accelerated to a higher-than-expected 7.2 percent in August as global oil prices surged to record levels, prompting a Bangko Sentral ng Pilipinas (BSP) warning that interest rates may be raised.

The National Statistics Office (NSO) reported yesterday that the increase in consumer price index topped the BSP’s forecast range of between 6.6 and 7.1 percent for August. Inflation stood at 7.1 percent in July.

BSP Governor Amando Tetangco Jr. said the higher-than-expected inflation last month, coupled with increasing liquidity and a narrowing interest rate differential between the Philippines and the US, would have to be closely monitored.

"Given this, we cannot rule out possible tightening (rates) in the short run," Tetangco said.

The BSP usually either raises its benchmark overnight interest rates or increases the amount of funds the commercial banks are required to place with the BSP when it tightens its monetary stance.

"The market is expecting a policy move especially if there is deteriorating in the factors that BSP mentioned," said Jose Mario Cuyegkeng, economist at ING Bank.

Economists previously said there was room for at least one more increase in BSP’s interest rates this year.

Monetary authorities raised overnight rates by a quarter of a point on April 7–the first rate change in nearly two years–to curb growing inflationary pressures fueled mainly by high oil prices.

The BSP’s key overnight borrowing rate is now at seven percent and its lending rate at 9.25 percent.

Monetary authorities also raised the reserve requirements–which dictate the amount banks must park with the BSP–by two percentage points to 21 percent on July 7, a move analysts said was aimed at protecting the peso from political uncertainties.

Rising costs of housing and related services accounted for the increase, the government statistics office said. Housing and repair costs rose 4.8 percent in August from 4.7 percent the previous month. Services, which include transport costs, rose 10 percent from 9.9 percent in July.

Prices of fuel, electricity and water increased 18.7 percent after an 18.9 percent gain in July.

Compared to July, consumer prices in August rose 0.5 percent after gaining 0.9 percent in the previous month.

For the eight months to August, inflation averaged 8.1 percent, more than the BSP’s full-year forecast of 7.9 percent.

Tetangco had said on Monday that "average inflation in 2005 and 2006 will likely exceed targets" due to soaring global oil prices.

The government now expects inflation to average 7.9 percent this year and 7.5 percent in 2006, compared to current government targets of five -six and four to five percent, respectively. – AFP