By JIMMY CALAPATI

Bangko Sentral ng Pilipinas Gov. Amando Tetangco yesterday said that the Monetary Board's decision to increase interest rates "aggressively" at half a percentage point is "decisive" and will not stunt growth.

"Any growth sacrifice over the near term is not expected to be large; in fact, appropriate rate hikes could reduce the long term cost to output growth from prolonged inflation which will be very corrosive to growth," Tetangco said.

The increase in key rates helped support the peso which jumped to 44.455 last Friday. it closed at 44.53 yesterday.

The increase brings the BSP's key policy interest rates to 5.75 percent for the overnight borrowing or reverse repurchase (RRP) facility and 7.75 percent for the overnight lending or repurchase (RP) facility.

"Of course there is a delicate policy balance between controlling inflation and maintaining the momentum of demand at a reasonable pace," Tetangco said.

He added that control of inflation is at the very top of BSP's policy priorities.

The government earlier revised its growth forecast for 2008 to 5.7-6.6 percent due to the adverse global downturn brought by high oil and food prices.

BSP said that even a "5 percent growth would be robust".

Tetangco said that price stability is a necessary ingredient for sustained economic growth.

"Present conditions provide latitude for monetary policy with the buoyancy of aggregate demand suggesting room for measured policy response," Tetangco said.

"No one, not even the rating agencies or the IMF, anticipated the virulence or the length of the price surges," Tetangco said.

He said that the decision of the MB shows their readiness and commitment to bring inflation down towards its desired path.

"The MB noted second round effects showing a more pervasive generalized impact. A rise in inflation expectations was also palpable and the MB wanted to act decisively to prevent high inflation from becoming entrenched in the psyche of markets and consumers," Tetangco added.

June inflation reached 11.4 percent, highest in 14 years. BSP even said that inflation for 2008 will peak by October, reaching to "at least 12 percent".

BSP last week also revised its inflation forecast from 7 to 9 percent to 9 to 11 percent for 2008.

The MB, 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.

Tetangco said that if sustained high inflation unseats expectations this would complicate macroeconomic management and possibly give rise to a wage price spiral that would be extremely costly.

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

By responding promptly to inflation risks, the BSP intends to reduce the risks to inflation expectations and the long-term cost to output growth from prolonged high inflation.

Authorities believe that the series of policy adjustments will help to steer inflation towards its desired path for the medium term.

But Fitch Ratings on Friday said that the move of the BSP for monetary tightening was "slightly delayed".

"When spillover or second round effects became evident, the BSP was quick to act by raising interest rates," Tetangco countered.

He said that he believes it is appropriate for monetary policy to accommodate first round effects and to monitor closely unfolding developments before reacting prematurely.

"Earlier BSP readings were that price developments were supply side in origin with mainly global roots and expected to be largely transitory," Tetangco said.