MANILA, Philippines - The central bank held its policy rate steady at a record low on Thursday, and lowered its inflation forecast for this year and next, prompting some analysts to scale back their expectations of a rate hike to later in the year.
   
It kept the overnight borrowing rate at a record low of 4%  for the eighth meeting in a row, as had been expected.

The central bank also lowered its inflation forecast for 2010 to 4.7% from 5.10% announced in April, and 3.6% for 2011 from 3.7% previously.
   
Central bank governor Amando Tetangco said last week the market turmoil caused by Europe's debt woes and tensions on the Korean peninsula would influence its policy decision.

Eight out of 11 economists polled by Reuters this week had expected no change to the policy rate. Three had predicted a hike to 4.25%. 

"The ranks of the hawks expanded after the strong GDP data came out. But our sense was that, the authorities would view the strength of the GDP numbers as inflated by election spending and the turmoil in Europe will cast doubts about its sustainability. That plus a benign inflation outlook. For that reason, they will remain on hold," said Tom Condon, Asia head of research at ING Bank in Singapore.

"We still pencilled three rate hikes by the end of the year. We expect the first rate hike in the third quarter of 25 basis points. Then two in the fourth quarter, for a total of 75 basis points for  2010."
 
Vishnu Varathan, an economist at Forecast in Singapore said the central bank's lowering of 2010 inflation forecast to 4.7% from 5.1% previously, was prompted by easing inflationary pressures from food and energy, and it provides the premise for the central bank to push policy normalization schedule further out.

"The BSP also alluded to the Euro zone debt crisis which heightens global economic uncertainty and adds another layer of policy consideration. The rate decision is a validation of that. The caveat though is that the central bank is prepared to recalibrate policy when necessary."

Varathan said Forecast is looking at a possible 25 basis-point hike in third quarter, with another one in the fourth quarter to bring rates to 4.5% if the euro zone crisis stifles global economic recovery.
 
On the other hand, Jun Trinidad, an economist at Citigroup in Manila said there is a heightened chance that the monetary policy board will remain on hold for the coming quarter.

"If wage growth remains low, then the coast is clear for rates to remain unchanged and policy to remain accommodative for some time now. We expect a rate hike only by the end of the year."

The important point aside from the decision to keep rates steady, said Simong Wong, an economist of the Standard Chartered Bank in Hong Kong, is the change in the central bank's inflation outlook going forward.

"I think this is important as it may tone down expectations that the central bank may actually raise anytime soon, because it seems the central bank is at ease with the inflation outlook. This could prompt the market to price in a more subdued inflation tightening going forward."