Thursday, 30 July 2009

Philippine inflation may hit 22-year low

PAOLO LUIS G. MONTECILLO
BusinessWorld
http://www.bworldonline.com/BW073009/content.php?id=001

CONSUMER PRICES may have contracted for the first time in over two decades this month, the Bangko Sentral ng Pilipinas (BSP) yesterday said.

In a text message to reporters, central bank Governor Amando M. Tetangco, Jr. offered a July inflation range of -0.3% to +0.6%.

The forecast is lower than the June result of 1.5%, and a negative result would be the first since February 1987’s -0.3%.

Mr. Tetangco gave no clear indication on the direction of monetary policy going forward, but market players said an end to a rate-cutting cycle was possible.

Negative inflation is usually a sign of an excessive demand slowdown. The central bank, however, noted that a contraction this month would be due to base effects.

"The low inflation numbers for July are being driven mainly by base effects of high commodity prices during the same month in 2008," Mr. Tetangco said. "In particular, global prices of petroleum products peaked in July 2008 around $140 a barrel."

"The disinflationary forces therefore are mainly a result of prices normalizing from spikes experienced last year. The BSP expects base effects to dissipate as the year progresses," he added, noting that inflation will likely pick up in the months ahead.

"Based on latest BSP forecast readings, full-year inflation for 2009 and 2010 is still expected to settle well within the target range of 2.5-4.5% and 3.5-5.5%, respectively," Mr. Tetangco said.

The central bank forecasts inflation to average at 3.3% this year.

"With inflation forecasts over the policy horizon within target levels, we consider the current policy posture sufficiently supportive of the growth dynamic of the Philippine economy," Mr. Tetangco said.

With the next Monetary Policy stance meeting set in three weeks’ time on Aug. 20, he said the BSP would "revisit policy settings and act as deftly possible, based on forward-looking indicators of inflationary pressures, the strength of demand and other relevant information."

Amid inflation declining from a peak of 12.5% last August, the BSP has cut its key overnight borrowing rate by a total of 200 basis points since December last year to 4%, a record low.

The BSP has also implemented several liquidity-enhancing measures to complement the rate cuts, including the tripling of its rediscounting budget and a reduction in bank reserve requirements. These represent the longest monetary policy easing cycle in the BSP’s history.

Marcelo E. Ayes, senior vice-president for financial markets at Rizal Commercial Banking Corp., said "The question is, has the BSP reached the end of its easing mode are we returning to the neutral stance?"

"I think the BSP will be looking at second-quarter growth. If that is still threatened, then may be rates can be cut by another quarter-point," he said.

The Philippine economy grew by just 0.4% in the first quarter, slower than the government’s 1.8-2.8% target.

This forced a cut in the government’s full-year goal to 0.8-1.8% from the previous 3.1-4.1%.

"I think the BSP is just giving themselves a little flexibility," Security Banking Corp. Treasurer Rafael S. Algarra said.

"Aside from inflation, I think growth is probably going to be a bigger consideration," he added.

Second-quarter growth is scheduled to be released next month.

"Between today and the policy meeting, the BSP will be able to see some data which would likely indicate how much the country grew in the second quarter," Mr. Algarra said.

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