December inflation falls to 9-month low of 8%

The nationwide inflation rate fell to its lowest level in nine months at eight percent in December due largely to the sharp drop in fuel prices, the National Statistics Office (NSO) reported yesterday.

As a result of the softening in prices, monetary officials said they intend to seek opportunities for policy easing this year.

“As inflation risks, particularly from food and fuel prices continue the recede, we will carefully consider opportunities for monetary easing, mindful of potential tightening financial condition,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said in a dialogue with the Tuesday Club at the Edsa Shangri-La Hotel yesterday where the BSP governor is the club’s traditional guest of honor in its first breakfast meeting for the year.

Analysts said the central bank could lower its policy rates by as much as 50 basis points at its next policy meeting on Jan. 29 to support domestic demand in the wake of recession in many major Philippine export markets.

The December inflation rate rounded up the whole-year average inflation rate to 9.3 percent, the NSO said, much higher than the 2.8 percent recorded a year earlier due to the soaring cost of food and crude in the first six months.

The December figure was an improvement on the 9.9 percent recorded in November — the first time inflation reached single digits for six months — but significantly higher than the 3.9 percent in November 2007.

Core inflation, which excludes volatile food and energy items, fell further to 7.3 percent in December from 7.9 percent in November, the office said.

This brought the annual average core inflation rate to 6.2 percent.

Philippines inflation hit a 17-year high of 12.5 percent in August as the price of oil and food — particularly the staple rice — rocketed.

Crude soared to almost $150 a barrel in July, which had a knock-on effect for transport and food prices, before falling rapidly to under $50 now.

The reduction in the December inflation rate was due to “the negative annual growth rate posted in the fuel, light and water index and the continued slowing down in the annual price increases of the heavily weighted food, beverages and tobacco and the services index.”

The drop in inflation to single figures in November allowed the central bank to aggressively cut interest rates by 50 basis points last month December.

Ron Rodrigo of DBP Daiwa Securities told Dow Jones Newswires that the lower inflation rate “favors further monetary easing,” although the central bank may not immediately cut rates after the last reduction on December 18.

The BSP had already cut its policy rates by 50 basis points in December but Tetangco’s statement indicated that further easing was on the table this year.

The BSP cut its key policy rates by 50 basis points, lowering its overnight borrowing rates to 5.5 percent and its overnight lending rates to 7.5 percent in an effort to stimulate the economy.

The market is widely expecting a 25-basis point cut but December’s monetary policy easing was more aggressive than expected, especially after monetary officials raised concerns over lingering inflation fears.

But the BSP needs to support efforts to encourage economic activities to prevent the economy from stalling in the next two years. With inflationary pressures receding, monetary officials now had the room to do just this.

According to Tetangco, inflation is expected to fall within target by 2010 when the government pegged its official target inflation range at 3.5 percent to 5.5 percent.

“This outlook is supported by the downward shift in the balance of risks following the easing of commodity prices, the moderation in inflation expectations and the expected slowdown in economic activity,” Tetangco said.

On the other hand, the BSP’s policy cut also came after the dramatic cut in US interest rates which the US Federal Open Market Committee reduced to as low as zero percent when it conducted its own policy meeting two days before the BSP.

Tetangco’s optimism over the inflation rate was bolstered by the general slowdown in the annual inflation in the National Capital Region (NCR) which dropped to 4.5 percent in December from 6.8 percent in November.

Inflation in Areas Outside NCR followed the same trend where inflation slid to 9.6 percent from 11.2 percent in November.

The NSO said the slowdown was brought about by the slower annual price increments of all the commodity groups except for H&R and miscellaneous index.

NEDA sees inflation at 6-8%

The National Economic and Development Authority (NEDA) expects inflation this year to fall within the Development Budget Coordination Committee’s forecast for 2009 of six percent to eight percent, which is higher than the target of 2.5 percent to 4.5 percent.

“Given the shocks to inflation this past year, the target for 2009 will fall within the DBCC forecast of six to eight percent. Nevertheless, inflation is expected to return within target rates in 2010,” Recto added.

Recto said the country’s inflation rate for 2008 settled at 9.3 percent, as the National Statistics Office (NSO) announced that December 2008 headline inflation rate slowed down to eight percent.

Recto said that lower fuel and energy prices pulled down December inflation, as prices of crude oil fell in the international market due to slackening worldwide demand, despite announcements of production cuts by members of the Organization of Petroleum Exporting Countries (OPEC).

“Reports from the International Energy Agency estimate that worldwide demand for crude oil declined in 2008, the first time that global demand decreased since 1983. This precipitated price rollbacks of local fuel products in December,” Recto said. – Des Ferriols with Iris Gonzales