June inflation slows to 7-month low of 3.9%

MANILA, Philippines - The growth in consumer prices fell to a seven-month low in June, supporting expectations the Bangko Sentral ng Pilipinas (BSP) will keep interest rates steady at its policy meeting next week.

The National Statistics Office (NSO) reported yesterday that the nationwide inflation rate stood at 3.9 percent in June, the lowest rate since November last year. The figure was slower than the 4.3 percent registered in May and brought the average inflation for the first half of the year to 4.2 percent. 

Stripping out volatile food and energy items, core consumer prices rose 3.7 percent in June from a year earlier, lower than May’s 3.8 percent rise.

The NSO said “slower annual price increases were seen in all the commodity groups except in the food, beverage and tobacco index.”

BSP Governor Amando Tetangco Jr. said they will continue to be watchful of demand conditions locally even as the current inflation path “puts the full-year inflation targets for 2010 and 2011 fairly safe.”

“June inflation at 3.9 percent is just a tad above the lower end of our forecast range for the month and nearly half a percentage point over the level in May of 4.3 percent,” Tetangco said.

The BSP chief pointed out that the lower inflation in June is consistent with the central bank’s full-year target of 3.5 percent to 5.5 percent for 2010 and three percent to five percent for 2011 giving monetary authorities enough elbow room to keep its key policy rates at record low during their meeting on July 15.

“This inflation path therefore puts the full-year inflation targets for 2010 and 2011 fairly safe, and thus provides BSP flexibility when we review the stance of monetary policy next week,” Tetangco added.

Tetangco said the latest inflation data provide the BSP “flexibility when we review the stance of monetary policy next week.”

Economists also believe that monetary authorities will keep rates on hold as inflation is likely to remain manageable in the coming months, with utility prices starting to stabilize and food prices relatively stable.

“No doubt the expectations-actual gap will buy the central bank some policy space,” said Vishnu Varathan, economist at Forecast Pte, Singapore. “We note that BSP will probably keep rates on hold at the July meeting with this accommodative inflation print.”

“We might see steady policy rate for the entire third quarter. We don’t think the July inflation figure will be significantly different from where we are at the moment. We don’t see anything in the horizon that could trigger a sharp uptick,” added Jun Neri, Bank of the Philippine Islands economist.

Last month, the BSP held its policy rate at a record low of four percent The last change in the rate was a 25 basis point cut in July 2009. This contrasts with some of its regional peers which have started to hike rates, such as Malaysia.

The central bank also cut its 2010 inflation forecast to 4.7 percent from 5.1 percent as risks from food and energy prices had lessened, even after the economy grew a seasonally adjusted three in the first quarter from the previous three months, its fastest in almost 22 years.