September inflation eases to 3.6 pct y/y

Posted at 10/05/2012 11:33 AM | Updated as of 10/05/2012 11:33 AM

MANILA, Philippines - The Philippines' annual inflation rate slowed in September, increasing the scope the central bank has to cut rates to support the domestic economy in the face of gloomy global conditions.

The consumer price index rose 3.6 percent in September from a year earlier, the statistics office said on Friday, slowing from 3.8 percent in August, and below a Reuters poll forecast for another 3.8 percent on-year change.

Core inflation, which strips out some of the more volatile components including food, was 3.8 percent in September, easing from August's 4.3 percent, while month-on-month inflation was down 0.1 percent.

Central bank Governor Amando Tetangco told Reuters on Sept. 26 that policy stimulus currently in place was sufficient to support domestic growth, but policy can be eased if needed later this year.

He said any adjustment to the key policy rate would depend whether the risk of inflation accelerating or risk of economic growth falling was greater.

With the average on-year inflation rate in 2012's first nine months at 3.2 percent, near the bottom of the central bank's 3 to 5 target band for the full year, economists said there was scope to ease policy further to boost the country's growth amid the weak global economic backdrop. A rate cut could also help contain the peso's strength and curb speculative inflows.

“It is becoming more likely the central bank will cut especially if the peso again continues to appreciate at this pace,” said Jun Neri, economist at the Bank of the Philippine Islands.

Neri said Friday's data "increases the probability of a cut" when the central bank meets to review policy on Oct. 25.

The Bangko Sentral ng Pilipinas has kept its overnight borrowing rate at a record low of 3.75 percent following three cuts this year - the last in July - totaling 75 basis points.

The cuts were aimed at shielding the economy against external shocks. The Philippine economy expanded 6.1 percent in the first six months from a year earlier. Policymakers are optimistic that growth will hit the higher end of a 5 to 6 percent target for 2012 on robust domestic demand fueled by remittances from Filipinos overseas and a growing business-process outsourcing sector.

These foreign exchange inflows, plus a strong influx of foreign capital, have helped make the peso the best performing currency among emerging Asian economies this year, with gains of about 5.5 percent against the dollar.

While a strong currency can help moderate inflation, it also makes Philippine exports less competitive and it reduces the purchasing power of remittances received by families of Filipinos living and working abroad, therefore crimping growth.