May inflation slows to 6.5%

Inflation grew by a slower 6.5 percent in May from 6.7 percent in April due to lower food, housing and fuel prices, which offset rises in services fees, the National Statistics Office (NSO) reported yesterday.

Analysts said the lower-than-expected inflation rate last month will give the Bangko Sentral ng Pilipinas (BSP) more leeway to cut interest rates to boost a sluggish economy.

"This is good news. The decline represents a trend and this could give the central bank room to further cut rates," Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura said yesterday.

He said the policy-making Monetary Board will take May’s relatively low inflation into account when deciding whether to further ease key interest rates.

Buenaventura also said that bringing down the overnight borrowing and lending rates to as low as 8.25 percent is likely this year if inflation stays benign.

The overnight borrowing rate is currently at nine percent and the lending rate at 11.25 percent.

"For us to bring down overnight rates to an average of 8.25 percent this year, the inflation average should at least average at 6.25 percent and should even go down to as low as 5.5 percent," Buenaventura said.

Boosting the chances of a cut in local key rates, according to Buenaventura, is the anticipated reduction of US key rates, which is expected this month and in August.

The BSP has lowered rates by 600 basis points since December after raising these by 400 basis points in October to defend the peso when it came under pressure after former President Joseph Estrada was embroiled in a corruption scandal.

For the five-month period, the government statistics office said the inflation rate averaged 6.7 percent. Month-on-month, inflation has also slowed to 0.1 percent in May from 0.3 percent in April, mainly due to a decline in the prices of fuel, light and water.

"Food inflation remains very manageable and that continues to cut the impact of higher inflation coming out of non-core sectors," said Joey Cuyegkeng, chief economist of ING Barings Securities.

By area, inflation rate in the National Capital Region dropped to 7.2 percent in May from 8.1 percent in April due to a slower increase in the prices of food, beverage and tobacco, housing and repairs and miscellaneous items.

In areas outside Metro Manila, inflation went up slightly to 6.3 percent during the review period from 6.2 percent in April brought about by the increases in the prices of services.

Economic stimulus

Analysts said the economy needs some stimulus after recording its worst growth rate in two years in the first quarter.

Gross domestic product (GDP) grew by 2.5 percent year-on-year in the three months ended March. Compared to the previous quarter, the economy contracted by 0.5 percent.

Merchandise exports, mainly electronics and the mainstay of the economy, fell 15.8 percent in April from a year ago.

"The headline (inflation) numbers provide the central bank with a lot of leeway," Cuyegkeng said.

"Coupled with the relatively weak growth numbers that have come out for the first quarter and the continued weakness in the manufacturing sector, I think the central bank will continue with its easy monetary policy and cut rates," he said.

But he warned that a rate cut could affect the exchange rate.

Analysts said market expectations the US Fed would cut US rates later this month also provided support to arguments for lower domestic rates.

"Maybe the question is whether the Philippines will wait for the Fed or go ahead on their own. I’d say the statements from Buenaventura seem to hint that they wouldn’t necessarily have to wait for the Fed before they cut some more," said David Cohen, an economist with S & P MMS in Singapore.

Cuyegkeng said: "I think the central bank has enough reason to move ahead of the Fed. If they anticipate Fed funds to be cut again, a 50 basis point cut should present no problems."