The Philippine central bank raised its interest rates by half a percentage point on Thursday, tightening policy for the second month in a row to combat inflation that is running at a 14-year high.

Bangko Sentral ng Pilipinas (BSP) said forecasts showed "the risks of inflation exceeding the inflation targets for 2008 and 2009".

"For this reason, authorities believe that more decisive monetary action is necessary."

The rise takes the overnight borrowing rate to 5.75 percent and the overnight lending rate to 7.75 percent.

Cayetano Paderanga, an economist, said, "Because everyone thinks inflation is on the uptrend, the BSP needs to increase interest rates. The BSP needs to do it in order to show people that [it] will not let inflation get out of hand. The higher the interest rate increase, the stronger the signal the BSP is trying to send."

The central bank did not tweak the availability of its Special Deposit Accounts as expected by some analysts. However, rates at this facility would increase in tandem with the increase in headline rates.

Move expected

The BSP was widely expected to lift its key interest rates.

All five economists in an abs-cbnNEWS.com poll said they expect the central bank to tighten its monetary policy for a second time in three years, but they had been divided on whether the central bank would lift rates by 25 or 50 basis points. The same rang true in a survey conducted by Reuters this week.

Last month, BSP hiked its rates by a quarter-percentage point to 5.25 percent for overnight borrowing and 7.25 percent for overnight lending.

"The problem in the Philippines is that inflation has clearly spread beyond simply food and fuel--services prices are rising rapidly--no surprise given the BSP poured fuel on the fire by cutting rates too far," George Worthington, chief economist of IFR Thomson, told abs-cbnNEWS.com in an e-mail.

"The last four rate cuts in October to January were crazy, given inflation was already accelerating and the economy was posting its fastest growth in a decade. And this will likely worsen before it gets better."

Worthington said the central bank should throw in an increase of as much as 50 basis points if it wanted to fight inflation accordingly.

However, such a drastic move could also worsen the already slowing economy. The central bank usually raises interest rates to mop up excess cash in the system, crimping consumer and business spending, among the major drivers of economic growth.

Inflation not yet at peak

In June, annual inflation hit 11.4 percent, the first double-digit figure this year. This brought the country's average inflation rate to 7.6 percent in the first half. The government's target for the whole year is 7-9 percent.

Worthington said he expects inflation to peak at around 12.6 percent in 2008 as fuel and food prices continue to escalate. The Philippines imports most of its fuel requirements and is one of the world's biggest importer of rice, its staple food.

"One of the problems is not just with the inflation side, it's the high oil prices," said Nicholas Bibby, senior economist at Barclays Capital, Singapore.

"The rate hike is certainly going to be helping. I do think that if the central bank continues on this track of more aggressive tightening, we certainly will see greater stability, but I suspect it's going to be more in the fourth quarter than currently." With a report from Reuters