MANILA, Philippines - Annual inflation rate fell to a seven-month low in June, official data showed on Tuesday, supporting expectations the central bank will keep interest rates steady at its policy meeting next week.

Inflation in June came in at 3.9%, its lowest since November. The figure was slower than the 4.3% registered in May, and below the 4.3% median forecast in a Reuters poll of 11 economists.

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

The National Statistics Office said "slower annual price increases were seen in all the commodity groups except in the food, beverage and tobacco index."

Bangko Sentral ng Pilipinas (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."

Steady rates

The central bank is widely expected to maintain key interest rates.

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 4%. 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% from 5.1% as risks from food and energy prices had lessened, even after the economy grew a seasonally adjusted 3% in the first quarter from the previous 3 months, its fastest in almost 22 years. With Reuters