MANILA, Philippines  (2nd Update) - The annual inflation rate in February was 4.3%, above market and central bank forecasts and the highest since May, reinforcing expectations authorities may start raising its policy rate as early as this month.

Headline inflation in February grew 1.1% from January, the highest month-on-month rate since July 2008.

Core consumer prices, which strip out some volatile food and energy items, rose 3.5% in February from a year earlier, faster than January's 3.3% rise, the statistics office said on Friday.

The Bangko Sentral ng Pilipinas has previously expected February inflation to be within the 3% to 4.1% range. 

Median forecasts in a Reuters poll were for annual rises of 3.9% in CPI and 3.2% in core CPI (consumer price index). 

The following are the key items in February, change from year earlier: 

•     Food, beverages and tobacco: up 4.2% (Jan up 3%)  
  •     Food alone rose 4.3% (Jan up 3.1%) 
•     Rice up 1.3% (Jan up 1.5%) 
•     Fuel, light and water climbed 9.9% (Jan up 11.8%)  
•     Services increased 4.9% (Jan up 3.8%) 

Food inflation, however, was not due to rising commodity imports, particularly rice.

The Philippines is the world's biggest rice importer, but it has reduced orders this year as previuos years' import volume resulted in extra supply. 

Double whammy

In a statement, the BSP explained that the higher food inflation for February was a result of heavy rains, particularly in Mindanao. The rains increased prices of fruits and vegetables.

Colder weather in February, on the other hand, "limited the supply of fish in the market."

The impact of higher crude prices was reflected in inflation for services. 

"Inflation for services accelerated due to increases in the domestic prices of petroleum products, largely influenced by rising imported crude oil prices and the recent hikes in transport fares," the BSP said. 

Simon Wong, economist at Standard Chartered Bank in Hong Kong, noted that the Philippines is exposed to food inflation and oil-triggered inflation.

"This is a double whammy for the Philippine economy," he said.

In the statement, BSP officer-in-charge Juan de Zuñiga said that "sustained higher global commodity prices, particulary for food and oil, and their follow-on effects on other prices could pose risks to inflation expectations."

He said the BSP is closely monitoring all risks to future inflation and will use appropriate monetary policy action "to ensure that price stability is safeguarded."

BSP governor Amando Tetangco said on Wednesday the scope for keeping rates steady has narrowed with inflation expectations on the rise, signalling a rate hike may come as early as this month. 

The Philippines is the only major Asian economy not to have raised rates since the end of the global financial crisis. 

The policy rate has been at a record low of 4% since July 2009. 

The BSP estimates average 2011 inflation at 4.4% and 3.5% in 2012, but there is a chance the forecasts would be raised when the central bank meets to review policy on March 24. 

The International Monetary Fund on Tuesday urged the Philippines to tighten policy to tackle rising inflation pressures, as it raised its 2011 growth forecast for the Philippines to 5% from 4%. 

"This clearly shows the central bank is behind the curve, Last night, even the ECB is talking about raising interest rates in April. The global environment is really turning," Standard Chartered's Wong noted. 

"This is clearly a step up in inflation fears given the oil market developments," he stressed. 

Wong reiterated their call for the BSP to raise interest rates.

"This confirms our call. We are still calling for a 25 basis point hike in March, but we are not ruling out a 50 basis point hike," he added.

The government is targeting growth of 7% to 8% this year, although the budget assumes growth of 5%, around the rates forecast by the World Bank and Asian Development Bank. 

The economy grew an annual 7.3% last year, the highest in more than 3 decades.  - with Reuters