August inflation edges up to 2.9%

Consumer prices edged up to 2.9 percent in August, but the Bangko Sentral ng Pilipinas (BSP) said inflation remained well below the full-year target and there was no need to change its neutral position on interest rates.

The National Statistics Office (NSO) said yesterday the August figure was slightly higher than July’s 2.6 percent, which was a 30-month low and the BSP’s own estimate of a 2.4 percent to 2.6 percent rise.

The NSO said the uptick was driven largely by higher food costs, which accounted for the largest share of the consumer basket.

"Upward adjustments in the prices of food as well as electricity rates and gasoline prices boosted inflation in August," the NSO said.

It also said that the latest data brings the average for the first eight months of the year to 3.3 percent, well within the government’s 4.5 to 5.5 percent target for the whole year.

BSP Governor Rafael B. Buenaventura said yesterday that the slight inflation uptick was not enough to warrant a hike in interest rates.

"The latest (inflation) figure should have no immediate impact given that inflation is still way below target but reinforce our neutral stance taken since early part of this year," Buenaventura said.

By area, inflation in the National Capital Region (NCR) went up to 3.1 percent in August from 2.9 percent in July due mainly to higher fuel, light and water costs.

Price increases in the rural areas were also up at 2.9 percent in August from 2.5 percent a month ago as a result of higher food prices.

Interest rate woes

The BSP’s key overnight borrowing rate currently stands at a decade low of seven percent and has not changed since March this year.

Analysts said that level was high compared to elsewhere in the region, but there was little incentive for rates to head lower at this point.

"I think they would like to, but given the uncertain outlook for crude oil prices and the possible impact of El Niño they would not want to reverse (the current neutral stance) quickly," said GK Goh Securities regional economist Song Seng Wun.

High oil prices, driven by fears of a war between the US and Iraq, have prompted refiners in the country to hike pump prices twice in the past four weeks.

In addition, the El Niño weather phenomenon that has in the past been a cause of severe drought was expected to hit the country from as early as next month.

"It would be best to leave rates where they are for now until we see clearer signs (of pressure on consumer prices) or the US Fed cuts its own rates," Song said.

Buenaventura said earlier this year that a Fed easing would give the monetary authority some scope to consider another cut in its own rates.

Fears of a double-dip recession in the US have revived talk that the Fed should consider another cut in its key rates to help give the American economy a lift.

"I think they are concerned about the potential (negative) effect on the exchange rate if they were to cut ahead of the Fed," said Lehman Brothers regional economist Graham Parry. "If it caused exchange rate volatility, it could have inflationary consequences."

Parry also pointed to the lack of loan growth despite recent rate cuts.

"The rate cuts have had limited impact on the banking sector, they are still hamstrung by their high level of non-performing loans," he explained.