While at the top end of the Bangko Sentral ng Pilipinas (BSP) forecast range, economists said the slower pace of increases in prices of food, beverages, tobacco, fuel and water meant the BSP had room to leave rates unchanged at Thursday’s meeting.
The BSP’s Monetary Board is to meet on Thursday for its monthly policy-setting meeting. The Monetary Board has kept its overnight interest rates unchanged at 6.75 percent for borrowing and nine percent for lending since July 2003.
BSP Deputy Governor Amando Tetangco said that policy makers are watching for any signs that inflation was being driven by strong demand, rather than largely reflecting the high costs of imported oil.
"Our forecast is a decelerating trend but there are risks to the outlook that can raise inflation expectations. It is important to prevent this from seeping into the demand side," Tetangco said.
Tetangco, however, refused to speculate on the inclinations of the Monetary Board but said it was important to prevent inflationary expectations from seeping into the demand side.
"These factors will be considered by the MB," he said.
ING Bank economist Jose Mario Cuyegkeng said the BSP might reconsider its stance if the government agreed to calls by transport and labor groups for increases in fares and wages.
"What’s key for them is whether their inflation expectations within the 15- to 18-month period will eventually trend towards the target level for 2006," he said.
Some analysts said the BSP may repeat a policy tightening made in February 2004, when it raised liquidity reserve requirements for banks to protect the peso from speculation before last May’s national elections.
4Cast Ltd said in a commentary that a lift in the reserve requirement was possible on Thursday as a pre-emptive step to mop up excess cash in markets coming from massive foreign inflows.
The government statistics office said softer prices of food and utilities offset the rise in other commodity items last month.
The BSP projected a year-on-year rise of 8-8.6 percent for March after reaching 8.4 percent in January and 8.5 percent in February.
Tetangco said the Monetary Board remained concerned and watchful of the global oil prices, anticipating its impact on domestic inflation rate. In New York, world oil prices hit more than $58 a barrel for the first time in history.
Excluding food and energy items that are included in the headline inflation figure, annual core inflation slightly slowed to eight percent last month from 8.1 percent in February.
Month-on-month, however, prices rose 0.3 percent in March after gaining 0.2 percent in February, following a sustained increase in selected food items such as rise, corn and meat and recent adjustments in fuel prices.
For the first quarter of the year, inflation averaged at 8.4 percent, well above the government’s full-year target of five to six percent.
The figures are based on the 2000 price basket. Until last December, previous inflation data were based on the 1994 price basket. –with Ted Torres