RP inflation tame but no rate cut seen

RP inflation tame but no rate cut seen

MANILA (Reuters): Philippine consumer prices rose a mild 3.9 percent year-on-year in June but the benign figure is unlikely to lead to an interest rate cut because of the weakness of the peso, analysts said on Wednesday.

The National Statistics Office said the lower-than-expected June inflation figure followed a month-on-month decline of 0.5 percent in the heavily-weighted food sub-sector. On an annual basis, food prices rose 1.5 percent after 1.8 percent in May.

Economists had predicted the figure would come in at around 4.2 percent, a forecast which was echoed by central bank governor Rafael Buenaventura as late as Tuesday. Inflation in May was 4.1 percent.

But markets did not respond much to the data. The peso weakened further to a new 21-month low at 43.695 to the dollar in late morning trade while the stock market was mostly flat.

Local financial markets have been hit by indications of a slowing economy, increased risk because of an escalation in clashes with Moro rebels in the south and little sign that President Joseph Estrada is coming to grips with charges of cronyism and inept administration.

Worries that two successive price hikes in petroleum prices in June and another one pending this month will lead to high inflation over the rest of the year kept the stock market in check, traders said.

"Inflation should have been positive for the market but the local increase in oil prices would still be negative and that would mitigate the favorable inflation rate for June," said Chris Canilanza, an analyst at Orion-Squire Capital Inc.

"On oil, we are going to see some more impact (on inflation) in upcoming months," said David Cohen, chief macroeconomic forecaster at MMS/S&P.

"Some of the businesses are still working to pass on the higher costs of the previous few months' oil price hikes."

Neither is the benign inflation likely to lead to a cut in interest rates, which could favor companies seeking to raise funds and provide some impetus to growth.

"The situation in the Philippines right now is very analogous to that in Indonesia, where rate considerations are being driven by the forex and not by inflation," Cohen said.

"Inflation in both countries remains well under control, as it does throughout the region,...but in both these countries the depreciation of the currency leaves no flexibility to lower rates."

Joey Cuyegkeng, an economist with ING Barings in Manila, agreed.

"Under normal circumstances, if you don't have that problem of confidence in the currency, then definitely that (the inflation figure) would have been a reason to reduce interest rates," he said.

"I think at the moment the central bank is seen holding interest rates at current levels."

But the tame inflation does indicate that the fighting with Moro rebels in the southern Mindanao region, which accounts for one-third of the country's farm output, has not had much impact on food prices, analysts said.

They said while there would be some upward pressure in coming months, inflation should come well within government targets.