UPDATE 2-Philippine inflation hits 14-yr high, rate rise seen

(Adds central bank comment, background, details)

By Rosemarie Francisco

MANILA, July 4 (Reuters) - Philippine inflation surged to a 14-year high in June on the back of a relentless rise in food and fuel prices and the central bank signalled it may raise interest rates further in response.

The National Statistics Office said on Friday consumer prices soared 11.4 percent last month from a year earlier. It was the biggest rise since May 1994 and exceeded both market and central bank forecasts. It was also the first time inflation had hit double digits since January 1999.

The Philippines which imports almost all of its fuel and is the world's biggest rice importer, was particularly hard hit by soaring world commodity prices, with rice prices up 43 percent compared with June 2007 and fuel costs rising 22 percent.

Core inflation, which strips out some volatile food and fuel items, also rose to 6.6 percent from 6.2 percent in May.

The peso PHP=, which has lost over nine percent to the dollar this year, adding to inflation woes, traded little changed from Thursday's close after the data.

But traders said the peso held ground thanks to the central bank, which was seen in the market selling dollars to prop up the national currency.

Central bank Governor Amando Tetangco said inflation should start cooling off late this year and head lower in 2009. But he also cemented rate rise expectations by suggesting a tighter policy was needed to keep demand pressures in check.

MORE TIGHTENING

"We share the view that current oil and food prices are hardly sustainable, producing a global slowdown and widespread inflation in all countries," Tetangco said in a mobile phone text message after the inflation data.

"This trend is expected to peak during this third quarter and to start coming down in the fourth quarter through 2009."

He added: "Demand pressures will moderate as monetary policy is generally tightened."

Analysts saw the comments as a sign the central bank will raise interest rates again at its next policy meeting on July 17 after it lifted its main rate by 25 basis points last month in its first rate rise in almost three years.

"I think the BSP (central bank) will respond by raising policy rates on 17 July," said Edward Teather, an economist at UBS, adding a rise of either 25 or 50 basis points was possible.

"I do think inflation will slow to a single digit next year, but without policy tightening ... it may not fall by enough to reach the central bank's inflation target range at the end of next year."