Low inflation to cushion impact of US rate hike

MANILA, Philippines - Despite accelerating in November, inflation remains low and should give the local economy enough buffer once interest rates rise in the US this month, the chief economist of the Department of Finance (DOF) said.

“Benign inflation will cushion the impact of the expected Fed lift-off by the end of the year,” Finance undersecretary Gil Beltran said in an economic bulletin last Friday.

Inflation, as measured by consumer price index (CPI), rose 1.1 percent in November, recovering from a record-low of 0.4 percent the previous month, the government reported last week.

The US Federal Reserve is highly expected to raise rates next week after keeping them low for over a decade to support the US economy’s recovery from the global financial crisis.

While higher rates in the US could also trigger a wave of increases in other countries, Beltran said low inflation would allow the Bangko Sentral ng Pilipinas (BSP) to keep interest rates steady.

“This will allow room for the BSP to avoid tightening monetary policy,” he said.

On its last policy meeting last Nov. 13, the central bank kept interest rates at four percent for overnight borrowing and six percent for overnight lending.

Higher rates in the US are expected to be followed by similar rises in emerging markets like the Philippines, which will try to keep their economies attractive with higher yields.

On the flipside, higher rates could dent consumer demand by making bank credit more expensive for borrowers.

But Beltran said the BSP can afford to stay pat on rates as a typhoon’s effect in inflation last month may have already waned. As of November, the 1.4 percent inflation is still below the official two to four-percent target for the year.

Food accounts for almost 39 percent of the CPI basket of goods and services. The DOF official said supply disruptions due to damage caused by Typhoon Lando in Northern Luzon resulted in higher food prices last month.

“The adverse price impact of Typhoon Lando will wane as farmers replant their destroyed crops,” Beltran said.