Central bank sees room for rate cuts as inflation slows

Reuters

Posted at Feb 05 2009 04:31 PM | Updated as of Feb 06 2009 12:31 AM

The Philippine central bank signalled more interest rate cuts by saying inflation slowing to a 10-month low in January gave it scope to support economic growth this year expected to hit its slowest pace since 2001.

Analysts expect a further reduction in interest rates of as much as 1 percentage point as oil and commodity prices continued to fall on easing demand.

The national statistics office said on Thursday that annual inflation in January eased to 7.1 percent, the lowest since 6.4 percent last March.

"This confirms our expectation for continued slowdown in price increases and gives the central bank more room to support the economy and ensure there is sufficient liquidity for the efficient working of the financial markets," central bank Governor Amando Tetangco told reporters in a mobile phone text message.

The central bank has lowered rates by a 1 percentage point over the last two months to 5.0 percent for borrowing and 7.0 percent for lending after inflation has steadily come down from a near 17-year peak of 12.5 percent in August.

"The disinflation trend just makes it more comfortable to hold on to the loosening stance," said Vishnu Varathan, economist at Forecast in Singapore.

"With demand dropping off a cliff and commodity/crude prices still pressured, the biggest threat to price stability, it seems, is an adverse move in FX," he said. "However, the lessening threat of demand pull inflation mitigates the situation, for now at least."

Core inflation, which strips out some volatile food and fuel items, came in at 6.9 percent in January, the slowest since 6.3 percent in July and the second straight month of deceleration.

The government expects growth to slow to 3.7 to 4.7 percent this year from 4.6 percent in 2008 -- a six-year low -- on poor demand for electronics exports. But the International Monetary Fund gave a grimmer forecast of 2.25 percent growth this year.

Tetangco already said last week the improved inflation outlook made room for further policy easing, allowing for easier access to liquidity and credit. But he added upside risks from volatile oil prices and the exchange rate could not be ignored.

The central bank will hold its next rate-setting meeting on March 5, the same day February inflation data will be announced.