By JIMMY CALAPATI

The Bangko Sentral ng Pilipinas yesterday raised its interest rates by half a percentage point, tightening policy for the second month in a row to combat inflation that is running at a 14-year high.

BSP Governor Amando Tetangco said "a decisive action" is needed to combat the risks of inflation seen exceeding targets for this year and next.

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

The central bank raised rates by 25 basis points in June, its first rate increase in almost three years.

The central bank did not tweak the availability of its Special Deposit Accounts (SDAs), as expected by some analysts.

However, rates at this facility would increase in tandem with the increase in headline rates.

BSP deputy governor Diwa Guinigundo said inflation forecasts for 2008 has been reset from 7-9 percent to 9-11 percent.

"But this do not take into account yet the impact of the monetary action last June and what we just did yesterday," Guinigundo said.

He added that inflation for 2008 would peak by October, reaching to "at least 12 percent".

Last June 5, the Monetary Board hiked key policy rates by 25 basis points, after inflation in May reached 9.5 percent.

June inflation reached 11.4 percent, highest in 14 years.

"The inflation outlook is more elevated than what we saw when we last met," Guinigundo said.

He added that the Monetary Board wants to be preemptive.

"We want to make sure that inflation expectation are more anchored," Guinigundo added.

The Monetary Board, in its assessment of price conditions, noted that concurrent and interrelated shocks to the economy-such as the persistent surge in oil prices and spikes in commodity prices-have contributed to elevated inflation readings.

The Monetary Board believes that second-round effects have set in, as evident in the rise in core inflation.

Second-round effects refer to additional inflationary pressures created by wage hikes, transport fare hikes and increases in utilities like power and water.

The regional wage boards earlier approved an increase in the minimum wage for private-sector workers. The government also allowed an increase in salaries of state workers.

Recently, the government approved increases in transport fares.

Economists noted that with the BSP planning to tame consumer prices, the pressure to curb excess liquidity-the amount of surplus cash in the financial system-has become stronger.

Increased cash in the Philippines financial system-brought about by wage hikes and rising transport fares-tend to ramp up demand for consumer goods, leading to higher commodity prices.

An increase in the BSP's borrowing rate encourages banks to deposit more of their funds with the central bank.

This tempers the rise of money in circulation, which, in turn, eases growth in demand for goods and services.

Tetangco said that sustained high inflation could unseat inflation expectations and potentially create a repeating cycle of lingering inflation and wage pressures that could prove costly to the economy.