Inflation seen inching up in Sept, rates on hold

Reuters

Posted at Oct 01 2010 06:29 PM | Updated as of Oct 02 2010 02:29 AM

MANILA, Philippines - Annual inflation probably picked up pace in September from August but most economists expect the central bank to keep rates steady at its meeting on Thursday, with the outlook for consumer prices expected to stay benign.

At next week's policy meeting, the central bank, Bangko Sentral ng Pilipinas (BSP), may lay the groundwork for a rate hike before the year ends via an increase in banks' reserve requirement to mop up excess liquidity from strong capital inflows, some analysts said.

The BSP may raise the reserve requirement to the pre-crisis level of 21% from 19% currently, they projected.

Annual inflation probably accelerated to 4.1% in September from 4% in August, according to the median forecast of 12 economists polled by Reuters, well-within the central bank's 3.6% to 4.5% forecast for the month.

The number of economists expecting rates to stay on hold at a record low of 4% for the rest of the year has gone up from the previous policy meeting in August.

Six of 12 analysts are betting on a rate hike in the current quarter, with one predicting a hike at next week's meeting.

Economists said the peso's strength, currently hovering at 2-year highs due to hearty fund inflows, may have helped to keep price pressures in check via lower import costs.

The Philippines imports most of its crude oil needs.

Policymakers have signalled a benign view of inflation, suggesting the central bank was not in a rush to tighten policy, though they emphasized the need to closely watch the potential impact of strong capital inflows on the economy.

Market impact

Market players do not expect the September inflation data to have much effect on local bonds unless the figure comes in significantly lower than forecasts, which could further lessen the chance of a rate increase this year.

Economists have been pushing back expectations of the first rate hike since the global financial crisis, because inflation has remained under control despite the country's strong growth.

The annual GDP growth in the second quarter hit a 3-year high.