Inflation slows to 3.3% in July

The inflation rate in July came in below market estimates giving a boost to the efforts of the Bangko Sentral ng Pilipinas (BSP) to hold down interest rates despite the weakness of the peso after a recent mutiny by rebel soldiers.

The National Statistics Office (NSO) reported yesterday that consumer prices rose by a slower 3.3 percent in July from 3.4 percent in June as prices of crucial food, beverage and tobacco items remained relatively stable during the month in review.

This brings the average inflation rate for the first seven months of the year to three percent, still below the 4.5-5.5 percent target for the whole of 2003.

BSP Governor Rafael B. Buenaventura said the latest figures validated the bank’s policy of keeping interest rates low to spur economic growth, a view shared by most economists.

"That’s good news (the latest inflation figure). That’s at the lower end of our forecast and validates our monetary policy of keeping rates down," Buenaventura said.

At a regular meeting last week, the BSP kept overnight interest rates steady, with the borrowing rate at 6.75 percent and lending rate at nine percent.

Socioeconomic Planning Secretary Romulo Neri said that barring any major weather disturbance, the average month-on-month inflation rate will increase slightly in the coming months due to the recent depreciation of the peso against the dollar.

But Neri said the rate should average between Inflation slow three percent and 3.5 percent, well below the government’s target of 4.5 percent to 5.5 percent and straddling last year’s average of 3.1 percent.

Despite the effects of tropical storms ‘Gilas’ and ‘Harurot,’ food supplies increased in July, particularly for fruits, vegetables and fish, the government statistics office said.

However, price increases for the fuel, light and water sector and the housing and repairs sector all went up slightly.

"It would take a very significant blip in consumer prices to detract from the central bank’s current relatively accomodative monetary policy," said Seng Wun, a regional economist at GK Goh Securities in Singapore.

"If political uncertainty and tension continues, it poses a further risk to the exchange rate and that raises the potential for imported inflation, though I see that as a small factor," Song said.

The peso has been trading at around 54 to the dollar since last week, following a failed military mutiny and amid persistent rumors of another coup attempt against the government of President Arroyo.

Despite this, Song said he still expects the full-year inflation rate to be below the 4.5 percent to 5.5 percent target set by the government.

The inflation rate for the highly urbanized capital of Metro Manila fell to four percent in July from 4.5 percent in June but the rate in the largely-rural areas outside the capital went up to 3.1 percent from three percent.

But economists said inflation could creep up in August after a strong typhoon in late July caused a significant damage to the country’s agricultural crop.

"August may move up again as we are likely to see some impact from the disruption to food supply from the typhoon in late July," said Cecilia Tanchoco, an economist at BPI Securities Inc.