By MAX ESTAYO

The Bangko Sentral ng Pilipinas yesterday raised its key rates by 25 basis points, its first upward adjustment since October 2005, as a preemptive strike to contain further increase in prices.

Before yesterday’s 25 basis point increase, the central bank had reduced key interest rates by as much as 250 basis points or 2.5 percentage points.

After the adjustment, the BSP’s overnight borrowing and lending rates were at 5.25 percent and 7.25 percent, respectively.

The government yesterday announced that inflation for May peaked at a nine-year high of 9.6 percent.

The peso crossed 44 to the US dollar and share prices dropped by two percent to a year’s low after the figures were announced.

BSP governor Amando Tetangco Jr. said given early evidence that prices may continue to soar, the monetary board recognized the need to act promptly.

Diwa Guinigundo, BSP deputy governor said that should prices go higher, the BSP is prepared to hike interest rates some more or adopt other measures to rein in inflation.

Tetangco said inflation may go beyond this year’s target of 7-9 percent and 4-6 percent next year.

"Because of the higher fuel prices and transport fare and wage adjustments that were implemented, these could lead to signs of second-round effects," Guinigundo, said.

He said the adjustments have been factored in this year’s inflation forecast but these may not be the last.

"There are other petitions filed with the regional productivity and wage boards. The transport fares is something else, that would have more pervasive effects," he said.

Guinigundo said as yesterday’s policy move would have a lag of 15-21 months; monetary authorities expect that it would help temper and bring inflation within target in 2009.

Should signs point to further increases in inflation and any indication that inflation expectation becomes disanchored, Guinigundo said the BSP would stand ready to "undertake" more policy actions.

"The monetary board stands ready to undertake further action if and when necessary to ensure the achievement of price stability," he said.

Earlier, analysts were divided on whether or not BSP will increase rates.

Analysts expecting a rate rise argue the central bank needs to act to protect next year’s inflation target of 2.5-4.5 percent and to reassure investors that they are bringing inflation under control.

Other economists’ say the central bank can hold off for now because the inflationary pressure is largely imported, not the result of consumer demand, and has yet to spill over into the broader economy.

Sin Beng Ong, an economist with JP Morgan, said the central bank needs to show it has inflation in hand.

"They need to send a signal some way or other," he said. "All the central banks that I look at — Indonesia, Malaysia, Philippines, Thailand — are on the move."

Asia’s central bank governors face their toughest test since the 1997 financial crisis with record leaps in rice, gas and other essential goods, raising the pressure to tighten monetary policy at a time of spluttering growth.

Core inflation, which excludes food and energy items, rose 6.2 percent in May from a year ago, a more subdued jump than the headline number.

"It (May inflation) was within the expected range. I don’t think that’s the signal yet for them to hike rates at this juncture, again because supply issues are bigger than demand pressures," said Radhika Rao, an economist with IDEAglobal.

"A token hike of 25 basis points might be exercised in July and September, just to signal to the market that the central bank is ready to act but I don’t think they would want to tighten any steeper. (with reports from Reuters)