Tuesday July 7, 05:56 AM
UPDATE 1-Philippine inflation at 20-yr low; 1 more rate cut seen
By Manolo Serapio Jr. and Karen Lema
MANILA, July 7 (Reuters) - The head of the Philippine central
bank suggested on Tuesday that it was ready to cut interest rates
further this week as inflation remained mild, but signalled it
was likely
near the end of its easing cycle.
Governor Amando Tetangco said June inflation data earlier on
Tuesday, which showed consumer prices rose at their slowest pacel
in over 20 years, gave the central bank room to cut rates again
at a meeting on Thursday after slashing them by a total of 1.75
percentage points since December.
He also reiterated comments he made on Friday that the
central bank was studying when to join other policymakers round
the world who have paused in their monetary easing campaigns as
financial markets and the global economy show signs of
stabilising.
'We are mindful of global and domestic financial and real
sector developments, particularly the actions of central banks in
the major economies to unwind prior liquidity and credit easing
measures,' Tetangco said in a mobile phone text message to
reporters.
Frederic Neumann, Asia Pacific economist for HSBC (LSE: HSBA.L - news) , said the
central bank was likely to put its rate cutting campaign on hold
after one more cut this week.
'The market had positioned itself for more than one more cut
and I think he (Tetangco) is trying to restrain expectations that
there will be more than one cut.
'The exit strategy talk signals to the market that there is
not much more in terms of rate cuts to come and that perhaps at
some point rates will have to go up as well, but I think rate
hikes are still about a year off. Nevertheless, we are close to
the end of the rate cycle easing.'
With inflationary pressures easing, analysts polled by
Reuters expect the central bank to cut its main rate one more
time by 25 basis points this week to a record low of 4.00
percent, and then pause to see if cheaper credit is giving a
substantial boost to the flagging economy.
The annual inflation rate in June eased to 1.5 percent, in
line with market estimates, from 3.3 percent in May. The previous
low was in April 1987, when the consumer price index (CPI (NYSE: CPY - news) ) rose
just 1.0 percent from the previous year.
Core (Berlin: LJ1.BE - news) inflation, which strips out some food and fuel prices,
came in at 3.9 percent in June from a year earlier, the lowest in
17 months.
'In terms of policy implications, the easing in core
inflation will be watched closely to gauge movements in
inflationary perceptions,' said Radhika Rao, economist at
IDEAglobal. 'This is not an impediment for the near certain 25
basis point cut on Thursday. The rate should plateau at 4 percent
thereafter.'
Some analysts said the central bank may resort to other
policy tools to help boost the economy in the absence of further
rate cuts.
The government has lowered its growth target this year to
0.8-1.8 percent from 3.1-4.1 percent after disappointing
first-quarter growth as the global financial crisis battered
Asian economies.
'We're looking at a rate hold after Thursday with the BSP (BSP.TA - news)
(central bank) probably having to resort to alternative tools -
probably more nuanced ones - to stimulate via easier monetary
conditions,' said Vishnu Varathan, economist at Forecast Pte.
'These tools have to be nuanced and aimed at easing
financing, not blowing out liquidity,' he said.
Varathan added there were lesser chances of a cut in banks'
reserve requirements but a higher probability of an increase in
the central bank's rediscounting facility, which it offers to
banks with short-term liquidity woes.
The central bank expects inflation to hit bottom in the third
quarter at around 1 percent and pick up in the following months
to reach an average 3.4 percent by the end of the year, within
the government's official target of 2.5-4.5 percent.
- For a graph on inflation, interest rates and the peso,
click on: http://graphics.thomsonreuters.com/079/PH_INF0709.jpg
- To read more analyst comments and more data, click on .
(Writing by Rosemarie Francisco; Editing by Kim Coghill)
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