by Erik dela Cruz/BMirror/12.02.08
HEADLINE inflation may be on a downtrend from the 17-year high of 12.5 percent in August but it remains high for the Bangko Sentral ng Pilippines (BSP) to cut policy interest rates this month, according to four financial institutions surveyed by the BusinessMirror.
With core inflation at 7.8 percent as of October, up from the previous month’s 7.5 percent, the BSP is unlikely to follow the lead of other central banks amid the deteriorating global economic outlook.
Core inflation in August was at 7 percent.
The BSP will hold its last policy meeting for the year on December 18. At its last meeting on November 20, the Monetary Board decided to keep the BSP’s key rates at 6 percent for overnight borrowing and 8 percent for overnight lending.
The BSP said in its latest postmeeting statement that “price pressures are retreating and inflation expectations are moderating, the rising readings on core inflation suggest that there are still price pressures in the pipeline.”
“Sources of upside inflation risks remain, including the volatility in the foreign-exchange market,” it added.
The trend in core inflation and the expected upward pressure on consumer prices during the Christmas holidays mean there will be no rate cut this month, said Marcelo Ayes, senior vice president for treasury at Rizal Commercial Banking Corp.
Core inflation tracks prices of goods and services that exclude volatile items such as food and energy.
Core inflation, according to economists, effectively captures price trends by taking out the effects of temporary disturbances or shocks on the consumer prices basket.
Headline inflation, which include prices of all goods and services, tend to be more volatile while core inflation provides a more accurate picture of the long-term trend in price movements.
The BSP expects annual headline inflation in November to range between 10.3 percent and 11.2 percent. It could be lower than October’s 11.2 percent as rice and other food prices continued to decline due to higher supply and favorable weather conditions, according to BSP Governor Amando Tetangco Jr.
“Core inflation at 7.8 percent remains high. Look at the core inflation figures and that would suggest when the BSP would possibly cut policy rates,” said Michael Oliver Manuel, chief investment officer of Sun Life Financial Philippines.
Despite having raised overnight by a total of 100 basis points between June and August to stem the pressure from record prices of rice and oil, central bank policy remains “very accommodative,” Manuel said.
“If you look at T-bill rates, the three-month rate at 6 percent and inflation at 11 percent, we’re still in the negative real interest-rate territory,” he said.
“Money supply growth has gone back to about 13.8 percent, which would suggest that the BSP is allowing money supply or the liquidity to flow into the market again,” he added.
Manuel said the BSP would not cut interest rates this month. It is “content on increasing money supply as a signal to the market that interest rates should remain low.”
Lim Su Sian, an economist at DBS Bank in Singapore, said interbank interest rates in the Philippines remain about 200 basis points below the policy rate, suggesting the country enjoys a high level of liquidity.
“As long as this remains the case, the BSP may feel little urgency in cutting rates. Given the likelihood that seasonal remittance flows could keep the interbank market well-supplied in December, there is some chance that the BSP could continue to dally,” she said.
Thus, it remains difficult to pin-point when rate cuts will happen, Lim added.
United Overseas Bank (UOB), another Singapore-based regional lender, expects the BSP to start cutting interest rates early next year to bring down the cost of money and quicken the economy in the face of an expected slowdown.
“We have factored in a 75-basis-point cut in the benchmark interest rates in the first quarter of 2009, barring sharp rebound in oil and commodity prices,” UOB said in its latest global economic outlook.
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