MANILA - Philippine annual inflation accelerated to near three-year highs in July, raising expectations of a further interest rate hike as early as in September - a prospect reinforced by the central bank governor's comments after Tuesday's data.
Governor Amando Tetangco warned that the central bank will not shy away from further policy tightening steps to curb pricing pressures, after headline inflation picked up more than expected in July to 4.9 percent on-year. It was the highest rate since October 2011.
"Even as we have already taken a series of policy actions to address liquidity growth and its attendant financial stability risks and to temper inflation expectations, we will not hesitate to use any of our tools to help guide market to keep inflation within the target range over the policy horizon," Tetangco told reporters in a mobile phone message.
Higher food prices were behind the uptick in the consumer price index, topping analysts' expectations for a 4.5 percent rise, and raising the chance the central bank's main policy rate could be raised again at its next meeting on Sept. 11.
In response to the growing risk of further tightening, the Philippine peso hit a session high of 43.57 against the dollar after the data.
Last week, Bangko Sentral ng Pilipinas raised its main overnight borrowing rate by 25 basis points to 3.75 for the first time in three years, aimed at taming price pressures as they threatened to top next year's inflation target.
The rate increase was the central bank's fourth and most aggressive move against inflation in as many meetings, and analysts expect further tightening ahead to anchor inflation expectations.
"We expect further tightening by the BSP. Not only do we think the central bank will raise the key policy rate one more time in the next meeting, we are also pencilling further adjustment in the SDA rates," said Gundy Cahyadi, economist at DBS in Singapore.
The consensus from a Reuters quarterly poll in July was for the central bank to raise the main policy by another quarter percentage point to 4.0 percent before the end of the year.
Bernard Aw, economist at Forecast Pte in Singapore said second quarter gross domestic product data, due on August 28, will be a crucial piece of data to watch in the run-up to the September policy meeting as the central bank will likely want to assess the impact of further rate hikes on growth.
The Philippine economy grew by a disappointing 5.7 percent in the first quarter, way below the government's 6.5 to 7.5 percent target for the year, hurt by the impact of last year's super typhoon.
The latest data brought average inflation in the seven months to July to 4.3 percent, government data showed, above the mid-point of the central bank's 3 to 5 percent target this year and outside its 2 to 4 percent target in 2015.
Prices of food and non-alcoholic drinks rose 8.2 percent in July from a year earlier, the biggest increase since April 2009. Food prices alone saw their biggest rise in more than five years at 8.7 percent. Food accounts for 39 percent of the consumer price basket.
The central bank expects average 2014 inflation of 4.33 percent against 4.4 percent previously, and 3.72 percent in 2015 versus 3.65 percent. Next year's forecast takes into account higher food prices, short-term volatility in global oil costs and pending increase sin power rates and transport fares.