Inflation slows to two-decade low

BSP says more leeway to cut interest rates

CONSUMER prices in June increased at their slowest pace in over two decades due to the continued drop in the price of fuel and food, the National Statistics Office (NSO) said on Tuesday.

The agency said inflation last month slowed to 1.5 percent from 3.3 percent in May, and 11.4 percent in June of last year. Last month’s inflation rate was the lowest since April 1987 when the price increases averaged 1 percent.

The June inflation rate was within the Bangko Sentral Pilipinas (BSP) forecast of 1.2 percent to 2.1 percent, bringing the first-half average to 5 percent.

In a separate statement, the BSP said the June inflation provided it more room to further cut its key interest rates.

“This confirms [the] BSP’s expected inflation path for 2009 and 2010 and gives the BSP room to ease [interest rates] further,” Governor Amando Tetangco Jr. said.

The BSP earlier revised its full-year inflation forecast to 3.1 percent, down from 3.4 percent. It however maintains a target of 2.5 percent to 4.5 percent for this year, and 3.5 percent to 4.5 percent for next year.

So far, the BSP has reduced its key policy rates by 175 basis points since December last year, bringing the overnight borrowing and lending rates to 4.25 percent and 6.25 percent, respectively.

Its policy-making Monetary Board is widely expected to trim further its policy rates by another 25 basis points when it meets on Thursday.

Tetangco said current assessments show risks to inflation remain tilted toward the downside.

He said the BSP is also mindful of global and domestic financial and real sector developments, particularly the actions of central banks in the major economies to unwind prior liquidity and credit easing measures.

“These actions are critical and weigh heavily on how the global imbalances would eventually correct, and ultimately influence how emerging markets, including the Philippines would come out of this crisis,” he said.

Separately, Socioeconomic Planning Secretary Ralph Recto said, “Rice, corn, fuel and electricity in June were generally less expensive compared to the same month last year. This contributed significantly to lower inflation in the said period.”

Recto, who is also National Economic and Development Authority (NEDA) director general, said the declining trend in food prices was also observed by the World Bank as the general fall in world demand took its toll on international commodity markets.

He further said fuel prices also reflected the lethargic demand as Dubai oil prices slipped from $127.82 a barrel in 2008 to $69.4 a barrel last month.

The NEDA chief added that electricity rates also declined as generation charges fell from P4.43 per kilowatt hour to P4.26 per kilowatt hour last month.

The NSO said prices of food, beverages and tobacco items—the biggest component of the basket of goods and services used to compute inflation—slowed down to 3.1 percent in June from 5.9 percent in May.

5-year Treasury rate falls

At Tuesday’s auction of 5-yeat Treasury bonds, the interest rate slipped 8.5 basis points to 6.093 percent from the previous rate of 6.178 percent when the government securities were last auctioned off on May 12.

The demand for the debt instruments hit P19.43 billion, or twice higher than the total P8.5-billion worth of IOUs on offer.

“The market is very liquid with new information of inflation rate plus expected issues from the government. All these contributed to good yields,” National Treasurer Roberto Tan said.

The government is due to pay P20.8-billion worth of regular bonds this week.

Despite raising its budget deficit ceiling to P250 billion this year, Tan said the government has yet to see if there is still a need to sell retail Treasury bonds next month.

“We will decide after we get the approval of the Monetary Board,” he said.

The Arroyo administration’s budget deficit ballooned by 556 percent in the first five months this year, as expenditures to prop up the economy outpaced tax collections.

Economic managers had raised the budget deficit ceiling from the earlier P199 billion, after growth slowed sharply to 0.4 percent in the first quarter of this year.

To plug its deficit, the Philippine government has lined up a number of options to raise funds, including a plan to borrow in the Japanese debt market through the issuance of so-called Samurai bonds, and the possible issuance of so-called ROPs or Republic of the Philippines sovereign bonds. –Darwin G. Amojelar, Senior Reporter with Maricel E. Burgonio And Lailany P. Gomez