Philippine Central Bank Signals Rate Increases May Be Near End

By Karl Lester M. Yap and Max Estayo

Sept. 5 (Bloomberg) -- The Philippine central bank said the smallest gain in the nation's inflation rate in 10 months was ``positive'' for consumer prices, suggesting that interest-rate increases may be nearing an end.

Consumer prices climbed 12.5 percent in August from a year earlier after rising a revised 12.3 percent the previous month, the National Statistics Office said in Manila today. That's the smallest increase in the inflation rate since October. Prices advanced 0.3 percent from a month ago, slowing from 1.6 percent in July.

The Philippines may start to focus more on growth after raising the benchmark interest rate three times since early June to rein in surging food and oil prices. The $144 billion economy expanded at the weakest pace in three years in the second quarter as consumer spending waned.

``Policy cycles in most of the region have turned down,'' said Prakash Sakpal, an economist at ING Bank NV in Singapore. ``It would be hard for the Philippines to buck that trend especially if inflation is trending down. It seems this would be the peak in inflation.''

Bangko Sentral ng Pilipinas Governor Amando Tetangco said today the latest number is ``positive for the inflation outlook'' and may help keep inflation at the lower end of the bank's forecasts of 9 percent to 11 percent this year, and 6 percent to 8 percent in 2009.

The central bank increased the overnight borrowing rate by 0.25 percentage point to 6 percent on Aug. 28. It will meet twice more this year to decide on borrowing costs.

``We don't expect any more tightening in the remainder of this year,'' Sakpal said.

Oil Risk

The central bank, which has since July said inflation may peak in October, now says price gains may start easing earlier.

``It is possible the peak may be earlier'' than October, Tetangco said yesterday. ``Oil prices, pump prices have been reduced. Food prices are moderating. Rice prices are starting to come down.''

Still, crude oil prices, which have retreated 27 percent from a record $147.27 a barrel on July 11, are up 44 percent over the past year, pushing Philippine inflation to the fastest in more than 16 years last month.

``A reversal in the downtrend of oil prices remains the biggest risk to the inflation outlook,'' Tetangco said today.

Domestic oil prices jumped about a quarter this year as crude rose to a record, fanning costs and wages. The government has approved higher transport fares, increased salaries for state workers and raised the minimum wage for employees in non- government companies.

Still Room

The cost of rice, the staple food of the more than 91 million Filipinos, fell 4.35 percent in the last week of August from a month earlier. Prices are still 43.2 percent higher than a year earlier.

``Despite the economic slowdown, there is still room for further rate hikes until the end of the year,'' said Jonathan Ravelas, a strategist at Manila-based Banco de Oro Unibank Inc. ``The central bank must be proactive as inflation expectations are still higher.''

The peso has declined 11.9 percent against the dollar this year, making imports more expensive. The Philippines purchases almost all of its oil abroad and is the world's biggest buyer of rice.

Food, beverage and tobacco costs rose 17.2 percent last month from a year earlier, slowing from a 17.8 percent gain in July, today's report showed. Food accounts for half of the consumer-price index. Fuel, electricity and water inflation accelerated to 7.2 percent. Services costs climbed 13.5 percent.

To contact the reporter for this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net