Lower fares to dampen inflation; rate cut seen

Reuters

Posted at Feb 18 2009 02:05 PM | Updated as of Feb 19 2009 03:16 AM

The Philippine central bank said on Monday it expects inflation to come in below forecast this year if a planned reduction in transport fares becomes final, signalling another cut in interest rates is likely next month.

Analysts said lower inflation would allow for some weakness in the local peso currency while 15.6 percent growth in money supply in December was unlikely to pose a threat to inflation.

"The impact on inflation is positive, meaning this could lead to lower inflation," central bank deputy governor Diwa Guinigundo told reporters late on Tuesday, referring to the planned cut in fares.

Guinigundo added that a reduction in transport costs was not factored into inflation assumptions this year. Last month, the central bank forecast inflation to come in at 3.9 percent this year, lower than earlier estimates of 6-8 percent and within the government's target of 2.5 to 4.5 percent.

Inflation hit 9.3 percent in 2008, the highest in a decade.

The country's national transport regulator is studying a near 7 percent cut in fares for jeepneys -- the most popular mode of transport in the country -- following sharp drops in oil prices in recent months.

If the cut pushes through, it would be the third reduction in transport fares since November. The Philippines had lowered jeepney fares by a total of 12 percent in November and December.

The central bank said on Tuesday slowing inflation gave it leeway to ease monetary policy further and analysts said policy rates should come down by about one percentage point in the coming months to support the domestic economy.

The central bank's overnight borrowing rate now stands at 5 percent and its overnight lending rate at 7 percent after a total one percentage point reduction in the past two months.

The next rate-setting meeting is on March 5.

"There is no threat at the moment for inflation breaching the target this year," Joey Cuyegkeng, economist at ING Bank in Manila said, adding there was scope for further rate cuts despite some weakness in the peso.

"We've put in an almost 10 percent (peso) depreciation on the average for this year. With that, we're still getting inflation within target levels," Cuyegkeng said.

The peso has lost nearly 1 percent so far this month but ranks as Asia's best performing currency so far this year next to the yuan.

The central bank said on Wednesday money supply in December climbed 15.6 percent from a year ago, accelerating from 14.6 percent annual growth in November.

The latest data brought the average money supply growth in 2008 to 8 percent, sharply lower than 17.4 percent in 2007.

Seasonally adjusted money supply grew 2.6 percent month-on-month in December from a revised 2.0 percent expansion in November.