BSP sees more inflows, Q2 inflation peak

Posted at 05/24/11 8:00 PM

Says too early to consider a rate rise pause

MANILA, Philippines - Inflation should peak in the current quarter as food and commodity price pressures moderate, and further capital inflows that would support the peso were likely in coming months, a deputy governor of the central bank said on Tuesday.

After being the last central bank of a major Asian economy to raise interest rates following the global financial crisis, the Bangko Sentral ng Pilipinas (BSP) has raised rates at successive meetings in March and May.

"Inflation appears to be peaking in the second quarter but will start stabilising in the second half," BSP Deputy Governor Diwa Guinigundo said in the Dealing Room, a Reuters Messaging chat room.

"Commodity prices, including those for oil and some key commodities, are coming down. The weather shocks are easing. Demand from advanced economies remain weak."

Guinigundo later told Reuters in an interview annual inflation in May "would not be as high as other segments of the market would expect."

Still, he said it was too early to consider a pause in rate increases, adding an increase in reserve requirements was a policy option if conditions warranted it.

"Until such time we see actual commodity, oil prices starting to ease and affecting general level of market prices, we should remain cautious and vigilant," he said.

Inflation, spurred by higher commodity prices, rising wages and capacity constraints, has become the top policy priority for most Asian central banks, against the backdrop of comfortable momentum in domestic demand and economic growth.

The BSP said it raised rates because its inflation target of 3% to 5% for this year was at risk. The two 25 basis points hikes have taken the overnight borrowing rate to 4.5%.

A Reuters poll last month showed most analysts expected at least one more 25 basis point increase this year, with some expecting the policy rate to rise to 5.25% by the end of 2011.

Inflation peaking

The annual inflation rate has risen to a one-year high of 4.5% in April from 2.8% in October, and policymakers have said it could top 5% in coming months.

"At this point, the upside risks are more dominant," Guinigundo said.

Gains in the peso have helped mitigate inflation pressures from rising prices of oil and other commodities, with the currency supported by remittances from Filipinos overseas of $4.6 billion in the first quarter of 2011, 6% higher than a year earlier.

Guinigundo noted the peso had not moved as fast as other Southeast Asian currencies, and said the Philippines was not attracting as much inflows as its neighbours.

"While the current account receipts remain strong, they are seasonally more modest," he said. "We expect more inflows shortly. That would have a telling impact on the peso."

Guinigundo said he was confident remittances would remain robust in the next few years, although he pointed out the overseas labour markets were maturing, with remittances now growing from a high base.

Asked about the decline in the euro, which hit two-month lows this week, Guinigundo said it was basically on account of problems in Greece and fear of them spreading.

He said Asian central bankers were aware of the risks related to holding euro assets.