August inflation seen at 7-month high

Posted at 09/04/12 10:09 AM

MANILA - Philippine annual inflation probably quickened to its fastest in seven months in August after weather-related supply shocks pushed food prices higher, but it is unlikely to nudge the central bank into action with the overall consumer price outlook still favorable. 

The consumer price index may have risen to 3.5 percent in August from a year earlier, according to the median forecast of 12 economists in a Reuters poll, the highest since January when the inflation rate hit 4.0 percent. 

Core inflation, which strips out some of the more volatile components, likely picked up pace to 4.3 percent from a year earlier after the previous month's 4.1 percent, the same poll showed, while month-on-month inflation probably accelerated to a four-month high of 0.7 percent. 

Policymakers have anticipated an uptick in August inflation, but believe that the supply disruptions caused by nearly two weeks of rain that inundated wide areas of the rice-growing provinces north of Manila would only have a one-off effect on domestic consumer prices. 

The central bank forecast annual inflation of between 2.9 percent to 3.5 percent in August, and is targeting a 3 percent to 5 percent inflation rate for this year and next. 

"The overall trend of inflation should remain benign and inflation should still stay comfortably below 4 percent for the rest of this year, despite the recovery in oil prices in the last few weeks," said Eugene Leow, economist at DBS. 

While many economists expect the central bank to cut its key policy rate  for a fourth time this year, they said the reduction will not be decided at the monetary authority's September 13 meeting because domestic growth is still resilient. 

"The low inflation thus far this year is even more impressive if we consider the rapid pace of GDP growth in the first half...we think another 25 basis rate cut will come by the end of this year to further bolster the economy," Leow said. 

The Philippines economy posted its slowest growth since the first quarter of 2009 in the April to June period from the previous three months as exports slumped and the farm sector weakened.  

But annual second quarter growth was better than expected at 5.9 percent, bring in first-half gross domestic expansion to 6.1 percent, above the government's 5 to 6 percent target for this year.  

Bangko Sentral ng Pilipinas Governor Amando Tetangco said on Monday the central bank's current policy stance remained appropriate, but authorities were watching the strength of foreign fund inflows following the U.S. Federal Reserve's comments it was open to further easing.