BSP sees one-off inflation hit from bad weather

Reuters

Posted at Aug 14 2012 09:57 AM | Updated as of Aug 14 2012 10:19 PM

MANILA (UPDATE) - The Philippines may see an uptick in inflation in the coming months due to weather-related supply disruptions, but it should not limit the central bank's room for policy with the overall consumer price outlook expected to remain favorable, Governor Amando Tetangco said on Tuesday.

Supply disruptions due to recent bad weather in the Philippines are expected to have a one-off impact on domestic consumer prices, Tetangco said, which means inflation should still average near the lower end of the central bank's 3 percent to 5 percent inflation target this year.

"The immediate impact would likely be a spike in the price of food and vegetables, given the disruption in the food supply chain," Tetangco told foreign journalists.

"But, as in recent natural disaster episodes, we can expect that this spike would be one-off, transitory and non-persisting," he said.

Nearly two weeks of rain inundated wide areas of the rice-growing provinces north of Manila and the farm department has so far estimated losses of about P723 million ($17 million), mostly in unmilled rice.

Annual inflation hit a six-month high of 3.2 percent in July, and analysts expect the central bank to hold off on cutting interest rates when it next meets in September, with prices likely to stay high due to supply shocks. 

The central bank cut interest rates by 25 basis points to a new low of 3.75 percent on July 26, the third reduction this year, to shield the economy from slower global growth and temper a rising peso that is hurting exports and remittances.

Manila is scheduled to release GDP data for the second quarter and first half of 2012 on August 30.

The economy grew at a higher-than-expected 6.4 percent in the first quarter from a year earlier, its fastest in a year-and-a-half, and officials have said the economy may have expanded by about the same pace in the second quarter.

Tetangco said he expected the domestic economy to stay resilient, buoyed by strong domestic consumption, while government spending on rescue and rehabilitation should also boost the country's growth.

He noted, though, that policymakers were closely watching developments in the global economy and the volatile capital inflows because of their potential impact on growth and inflation.

"Capital inflows into the country have become more speculative than structural, given global investors' search for yields," Tetangco said.

"We are mindful of this tendency to search for yields in various asset markets, as often, this raises the risk of asset price bubbles, which can also potentially undermine financial stability."

Tetangco reiterated the central bank was prepared to consider additional measures to help manage strong capital inflows, if necessary, to keep financial markets orderly.