Philippine inflation soars, raises pressure on c.bank

By Rosemarie Francisco

MANILA, June 5 (Reuters) - Philippine annual inflation soared to a nine-year high of 9.6 percent in May, above market expectations, pressuring the central bank to boost interest rates on Thursday for the first time in nearly three years.

Following the data, the peso dropped through key support at 44 per dollar to its lowest level since last October, prompting the central bank to intervene by selling dollars, currency traders said.

The central bank had earlier forecast consumer prices would rise 8.8-9.6 percent year on year and a Reuters poll had produced a median forecast of 9.1 percent.

Yet another jump in the price of food and fuel sent the figure to the top of the central bank's range.

Food prices soared 14.3 percent year-on-year in May with the prices of the national staple rice climbing nearly 32 percent, the National Statistics Office said. Fuel and utility prices surged 8.2 percent.

On the heels of such red-hot price rises, some economists were convinced the central bank would raise rates by 25 basis points when it meets later on Thursday. It would be the first rate rise in nearly three years.

"We do think this increases the chance of a 25 basis point increase," said Frederic Neumann, an economist at HSBC.

"At the margin, the central bank may even raise it by 50 basis points. However, we think they will deliver on the 50 basis point increase only by the third quarter."

But others said the central bank may wait for later in the year.

Vishnu Varathan, economist at Forecast Pte, said: "The caveat is that signs of second round effects will be the trigger and the central bank indicates that there are no signs of one yet."

"I am sticking to my 'no change' call."

Earlier this week, half of 12 economists polled by Reuters said the central bank would raise its key rates by at least 25 basis points on Thursday, the first increase since October 2005.

The remaining six said the central bank would keep its powder dry and wait to see whether recently announced wage increases were further stoking inflation.

PESO WEAKENS

After the announcement of inflation data, the peso PHP= weakened to break through 44 to the dollar, prompting an immediate response from the central bank to sell dollar in support of its currency.

The peso was quoted at 44.07 in early trade, down from its close on Wednesday at 43.945.

The peso has suffered a reversal of fortune this year, dropping nearly 6 percent due to risk aversion and a gloomy picture of rising inflation and slowing growth. In 2007, it was Asia's top-performing currency with a gain of nearly 19 percent.

The stock market .PSI opened 0.33 percent down at 2,764 points.

Asia's central bank governors face their toughest test since the 1997 financial crisis with record leaps in rice, gas and other essential goods raising the pressure to tighten monetary policy at a time of spluttering growth.

The Philippine central bank governor said last month fighting inflation was more important than supporting growth but has signalled that it would only act if its 2009 inflation target of 2.5-4.5 percent was at risk.

The central bank appears to have given up on its target of 3-5 percent inflation in 2008, analysts say.

Annual inflation in the first five months of the year was running at 6.9 percent.

Inflation last year averaged 2.8 percent, a 21-year low, mainly due to a strong peso which tempered imported inflation.

The Philippine economy braked sharply in the first quarter giving the central bank room to hold off on a rate hike but government's plans to spend an additional $2 billion this year could jeopardise the 2009 inflation forecast.

First-quarter GDP grew 5.2 percent on the year, against 7.3 percent growth in all of 2007, a 31-year high.

May inflation was the highest annual inflation rate since 10.5 percent in January 1999.

Core inflation, which strips out some volatile food and energy items, reached 6.2 percent in May compared to 5.9 percent in April.

OTHER STORIES > More comments on Philippine inflation..........[ID:nSP112194] (Additional reporting by Karen Lema; Writing by Carmel Crimmins; Editing by Raju Gopalakrishnan and Louise Heavens)