July inflation to edge up, another rate cut seen

Reuters

Posted at Aug 03 2012 12:41 PM | Updated as of Aug 03 2012 08:41 PM

Inflation may have picked up on higher utility, fuel costs

MANILA - Philippine annual inflation may have quickened in July on higher utility rates and fuel costs, but probably stayed at the low end of the central bank's 2012 target range, supporting views there may be scope for another rate cut this year.

The consumer price index last month probably rose 3 percent from a year earlier, a Reuters poll of 12 economists showed, higher than June's 2.8 percent. But the CPI is well within the central bank's 2.6-3.5 percent forecast for July. 

Governor Amando Tetangco on Thursday expressed his readiness to take more policy action, if needed, adding the central bank was evaluating if there was scope for more liberal foreign exchange rules to help better manage strong capital inflows.

The Bangko Sentral ng Pilipinas cut interest rates by 25 basis points to a new low of 3.75 percent on July 26 to shield the economy from slower global growth and temper a rising peso that is hurting exports and remittances.

"At this point in time, we think that the latest action of the Monetary Board is consistent with the latest assessment of the inflationary environment," Tetangco told reporters.

"But things do change, and we should be alert to these changes and see whether there is an indication of a need for another policy change." 

Economists forecast inflation would average 3.1 percent this year, matching the central bank's estimate.

Before last month's interest rate cut, most economists were predicting borrowing costs to be left on hold at 4.0 percent because domestic demand was holding up well despite the global turmoil.

But as concerns over the health of the global economy intensified, and with the peso likely to strengthen further
against the U.S. dollar on the back of strong capital inflows, some economists are now looking at a fourth rate cut this year. 
  
The Philippine economy expanded at a faster-than-expected 6.4 percent annual pace in the first quarter, its fastest in a year-and-a-half, but economists have warned the economy could lose momentum in the coming quarters due to global headwinds.

"The benign inflation rates have given the BSP room for one more cut to focus on maintaining growth momentum in 2012," said Jeff Ng, economist at Standard Chartered Bank in Singapore.

For Sanitarn Sathirathai, economist at Credit Suisse in Singapore, further policy easing would be aimed at discouraging inflows, which have helped lift the peso to become Asia's best performer so far this year with gains of nearly 5 percent.

"This (another rate cut) is based on our view that the central bank's decision is driven more by inflation and concerns over capital inflows than GDP growth developments," said Sathirathai said.

"With relatively solid GDP growth, low inflation, the prospect of a further credit rating upgrade, and the likelihood of the US Fed's easing further in the form of QE3, the economy should continue to see inflows despite the government's attempts to reduce speculative flows," he said.

The central bank next reviews policy on Sept. 13.