Bangko Sentral Forecasts Deflation in July

Jul. 30-- THE Bangko Sentral ng Pilipinas (BSP) said prices this month may have declined, marking the first time in nearly two decades that the country experienced deflation.

In a statement, BSP Governor Amado Tetangco Jr. said inflation is likely to fall within the range of -0.3 percent to 0.6 percent in July from 1.5 percent in June as prices normalize from the peak of oil prices last year.

Inflation fell -0.3 percent in October 1986.

"The low inflation numbers for July are being driven mainly by base effects of the high commodity prices during the same month in 2008. In particular, global prices of petroleum products peaked in July 2008, with Dubai [crude] reaching around $140 per barrel," Tetangco said.

However, the BSP expects base effects to dissipate as the year progresses.

Tetangco said the disinflationary forces therefore are mainly a result of prices normalizing from spikes experienced last year.

Based on the latest BSP forecast, Tetangco said inflation is expected to settle within its target range of 2.5 percent to 4.5 percent this year and 3.5 percent to 5.5 percent next year. Inflation averaged 5 percent in the first six months this year.

The central bank, however, forecast inflation of 3.3 percent this year and 3.5 percent next year.

"With inflation forecasts over the policy horizon within target levels, we consider the current policy posture sufficiently supportive of the growth dynamics of the Philippines economy," Tetangco said.

The Monetary Board's next policy meeting is scheduled on August 20.

"We will revisit policy settings and act deftly as possible, based on forward looking indicators of inflationary pressures and of the strength of demand, and other relevant information," Tetangco said.

The BSP has reduced key policy rates by 200 basis points since December last year, bringing the overnight borrowing and lending rates to record lows of 4 percent and 6 percent, respectively.

The market expects the BSP to continue easing its policy either provided the inflation outlook remains favorable. In November last year, the BSP cut its reserve requirements to 19 percent from 21 percent to let loose more money into the domestic financial system and mitigate the impact of a global credit crunch.

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