"Slowing inflation may convince the central bank-Bangko Sentral ng Pilipinas (BSP) and its policy makers to keep borrowing costs unchanged at 7.5 percent when they next meet on Aug. 10," the firm said, in its latest Emerging Markets Sovereign Journal.
Bear Stearns noted that Philippine inflation slowed to a two-year low in July as food and fuel price gains eased, giving the central bank room to keep interest rates unchanged.
Consumer prices, on the other hand, rose 6.4 percent from a year earlier gaining 6.7 percent in June.
Bear Stearns also noted that President Arroyo’s government needs to lower interest rates to spur consumer spending, which accounts for three-quarters of the Philippines‚ economy.
"Price increases have averaged seven percent so far this year. The central bank is aiming for price increases of between four percent and five percent next year," it said.
It also noted that the Philippines has upgraded its export growth target for this year to 10 percent from eight-percent goal earlier set due to strong performance of the global semiconductor market.
"The new export target for this year is much higher than the 3.7- percent actual growth in 2005 and reflects the fact that in the first five months of the year, the country’s export earnings have surged by 16 percent compared to the same period in 2005," it said.
It added that "much of this is driven by the doubling of electronics industry investments last year in the Philippines."
"The country’s electronic products, which account for two-thirds of export earnings, consist of semiconductors, office equipment, telecommunication and medical/industrial instrumentation," it said.
BSP Deputy Governor Diwa Guinigundo said the adjustment, if there is any on the US Federal rates will not have a substantial impact on the local interest rates.
"The market thinks the US Fed will not consider a 25 basis points increase. It is something to think about. It is not a significant factor in our policy decision. The factors we are considering are demand pressures, second round effects and inflation expectations.
As this developed, the Development Budget Coordinating Committee (DBCC) sources said the government economic managers may revise the average peso-dollar exchange rate target for 2007 to P53.50, a depreciation as against P52.40 to a dollar assumption this year.
DBCC will also adjust average crude price level targets to $63.42 in 2006 and $67.05 in 2007. This year, the DBCC originally targets only $62 to $63 per barrel.
"Peso is seen to depreciate due to higher crude prices next year,"the sources said.