MANILA, Philippines -- Philippine annual inflation probably moved closer to 10 percent in May due to soaring food and fuel prices, raising the possibility the central bank might lift interest rates for the first time since October 2005, economists said.
The central bank expects inflation to range from between 8.8 percent and 9.6 percent.
Inflation in April hit a three-year high of 8.3 percent, bringing the average rate for the first four months to 6.2 percent, well above the central bank's target of 3.0 percent to 5.0 percent.
The government will release the May inflation data Thursday, the same day that the central bank will meet to decide on interest rates. Policy makers have kept the overnight borrowing rate at 5.0 percent and overnight lending rate at 7.0 percent at the last two meetings.
The central bank slashed the rates by a total 100 basis points between October and January, as inflation last year averaged 2.8 percent, below the target of 4.0 percent to 5.0 percent.
"The bias is for the central bank to reverse its relaxed monetary policy to that of tightening a little because of inflationary pressures," said Jose Vistan Jr., research director at AB Capital Securities.
"I would imagine that adjustments, if there would be, would be small and policy makers will have a hard time striking a balance --- sustaining economic growth and keeping a reasonable inflation level."
The central bank "should do whatever possible to keep growth above 5.0 percent, but raising rates too much would put additional burden on the economy, so rate adjustments will likely be minimal," Vistan said.
Data released last week showed Philippine economic growth slowing to 5.2 percent in the first quarter from 6.4 percent in the previous quarter and 7.0 percent in the first quarter of 2007.
Growth slackened as a slowdown in the United States weakened exports and soaring food and energy prices hurt consumer spending.
"The GDP data highlights the fact that the Philippines hasn't really decoupled from the US, even if our exports to that market have shrunk," said Jonathan Ravelas, chief strategist at Banco de Oro Unibank, adding the figures point to Manila's "vulnerability to external shocks."
But Ravelas said the central bank has signaled that it is more concerned now about inflation than the economic slowdown, which means a rate hike is on the cards.
INFLATION VS GROWTH
"We expect the central bank to make a preemptive, calibrated move. A quarter of a percentage point rate hike is possible, with the central bank keeping a tightening bias in the coming months," said Ravelas.
The central bank's focus is on the second-round price pressures following the government's approval of wage and transport fare hikes last month.
Oil prices on the world markets hit new highs in May, with the US benchmark light, sweet crude for July delivery peaking at $135.09 a barrel on concerns about inadequate supply.
The continued rise in oil prices raised worries that inflationary pressures would intensify, especially in a country heavily dependent on imported crude like the Philippines.
"High inflation is always a concern and the Philippine central bank, I believe, will be prompted to raise interest rates by about 25 basis points as it tries to contain inflation," said David Cohen, chief economist at Action Economics in Singapore.
"The central bank will make a very tough call and tighten its monetary policy, especially if inflation starts feeding on itself," said Cohen who sees inflation rising further to 8.6 percent in May.
But some economists believe there is no urgency for the central bank to lift interest rates given the disappointing GDP data.
"We see inflation peaking at 9.0 percent and stabilizing in the second half of the year. The central bank will likely keep rates unchanged given the weak GDP report," said Simon Wong, economist at Standard Chartered Bank.
"The central bank would want to keep the economy going rather than focus on inflation," he said.
