Inflation in Oct eases to 2.7%; BSP eyes rate cuts

The country posted a lower-than-expected inflation rate of 2.7 percent in October, prompting Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura to announce that the news might give monetary authorities more flexibility in setting interest rates.

"That’s good news. It’s at the lower end of our estimate at 2.7 percent to 3.1 percent. It reinforces our neutral policy stance and probably allows us more flexibility," Buenaventura said.

The October figures brings the inflation rate for the first 10 months of the year to 3.2 percent, well within the government’s inflation target of 4.5 to 5.5 percent for the whole of 2002, the National Statistics Office (NSO) reported yesterday.

The government statistics office also announced that the inflation rate dropped 0.1 percent month-on-month.

"That’s a surprise. I was looking for close to 3.2 percent. It’s certainly a surprise given higher oil prices," said Luz Lorenzo, ATR Kim Eng Securities research head.

"It means the BSP can continue to hold the line on interest rates for now," he said.

The rate for urbanized Metropolitan Manila slipped to 2.6 percent in October from 2.9 percent in September while the rate for the largely-rural areas outside the capital was steady at 2.8 percent in October.

The downturn in the October inflation rate was attributed to slowdowns in price increases in such key sectors as food, beverages and tobacco which fell to 1.9 percent in October from 2.2 percent the previous month.

Inflation for the housing and repairs sector also fell to 4.3 percent in October from 4.5 percent in September while the rates for clothing and miscellaneous items remained flat at 2.5 and 1.8 percent respectively.

"The 2.7 percent (inflation rate) is much better than we expected, and this is a very positive figure for us," Andrew Long of ATR Kim Eng Securities Inc. said.

This bolsters expectations that the full-year average inflation rate increase will be lower than the government’s 4.5 to 5.5 percent target, possibly closer to three percent, Long said.

However, Long said the rise in consumer prices is expected to accelerate again in November and December as consumer spending peaks during the Christmas holidays.

Interest rates

"I think what the BSP has been doing has been much in line with what the Fed does, so if the Fed moves on Wednesday there may be some room for the BSP to move," said Ai Ling Ngiam, economist at ABN Amro Singapore.

"I think they would like to lower rates given concerns about the budget deficit in order to get lower funding rates."

The BSP tends to follow the lead of the US Federal Reserve in moving its interest rates.

The US Fed is widely expected to cut its target rate by 25 basis points, although the BSP has said it was not contemplating any change in its current overnight rate setting even in the event of a Fed cut.

Asked what the BSP would do if the US Federal Reserve cut its rate as expected on Wednesday, Buenaventura said: "We’ll see. We still don’t know if they will cut."