August inflation quickens, rates seen steady

Reuters

Posted at Sep 05 2012 10:00 AM | Updated as of Sep 06 2012 07:11 PM

MANILA (UPDATE) - Philippine annual inflation picked up more than expected in August on higher commodity costs, dimming the chances of a rate cut at next week's policy meeting, although a rate reduction was still likely before the year ends. 

The consumer price index in August rose 3.8 percent from a year earlier, the statistics office said, above the markets' 3.5 percent forecast, and the highest since January when it hit 4.0 percent. 

the uptick in August inflation is unlikely to cause concern among policymakers, with the impact of food supply disruptions caused by heavy rains and floods last month expected to taper off in the coming months. 

Central bank Governor Amando Tetangco said the current policy stance remained appropriate, with this year's average inflation target of 3 to 5 percent still within reach. In the eight months to August, inflation has averaged 3.2 percent. 

Core inflation, which strips out some of the more volatile components, was 4.3 percent in August from a year earlier, picking up from July's 4.1 percent, while month-on-month inflation was 0.8 percent, slightly higher than market's estimate. 

"The inflation path is largely expected to continue being well-behaved," Tetangco said in a mobile text message to reporters. "The stance of policy therefore remains appropriate." 

RATE CUT? 

Elsewhere in Asia, Indonesia's annual inflation unexpectedly picked up in August, though it is expected to remain within the central bank's target, while Thailand's annual inflation rate was steady, allowing policymakers to focus on supporting growth. 

The Bangko Sentral ng Pilipinas cut interest rates to a new low of 3.75 percent last month, its third rate cut this year, 

and authorities have expressed their readiness to take action to strengthen the economy's buffers against the global downturn. 

While economists see room for another rate reduction this year given the problems facing the world economy, they expect the central to hold fire when it meets on Sept. 13 to review policy.   

"Along with relatively strong second quarter GDP and rebound in inflationary expectations, BSP (Bangko Sentral ng Pilipinas) is unlikely to follow-up with a rate cut at next week's meet,"Radhika Rao, economist at Forecast Pte in Singapore.   

"Nonetheless, the central bank will continue to monitor the progress on stimulus plans by the major central banks, which in turn could result in higher capital inflows into the emerging market space, including the Philippines," Rao said.  

A potential surge in capital inflows to emerging markets including the Philippines was a challenge to policymakers because of their impact on domestic inflation and it could increase volatilities in the foreign exchange market. 

Annual growth in the first six months of the year held up well at 6.1 percent, above the government's 5 to 6 percent growth target, but economists have said the economy will likely face more pressure in the second half given the weak outlook for exports. (Reporting by Karen Lema; Editing by Sanjeev Miglani)