MANILA: The Philippines central bank could have less room to hold interest rates at record lows due to prices pressures, its governor said on the eve of a policy meeting after data showed a sustained uptrend in inflation over the past five months.
The central bank has held its overnight borrowing rate at a record low of 3.5 percent since October 2012, and while 10 out of 11 analysts in a Reuters poll expect no change at Thursday's policy meeting, rising inflation has increased the odds of a rate hike happening sooner rather than later.
"We still have room to keep rates steady, but given how these factors play out, that room may be narrowing," Governor Amando Tetangco said in a mobile text message to reporters after the latest inflation report.
"We will see if any adjustments to the stance of policy are warranted based on the balance of these risks to the inflation outlook over our policy horizon," Tetangco said.
The consumer price index in January rose 4.2 percent from a year earlier, putting inflation at its highest since November 2011.
Accelerating from 4.1 percent in December, inflation remained above the mid-point of the central bank's 3-5 percent target for 2014 for a second consecutive month due to higher food prices. A weak peso may have also contributed to the uptick.
The January reading matched the consensus forecast from a Reuters poll of analysts, and was near the upper end of the central bank's own forecast of 3.4-4.3 percent for the month.
"If inflation continues to rise in the first quarter, we acknowledge the risk of BSP (central bank) being more pre-emptive in its policy stance and tightening could be brought forward to second quarter," ANZ bank said in a research note.
The consensus from a Reuters quarterly poll in January was for the central bank to start raising rates in the third quarter.
Speculation of policy tightening may lend some support to the peso, which has been swept up in a global emerging markets rout despite the country's resilient economic growth figures.
The peso is the second-worst performing emerging market currency in Asia this year with a loss of around 2 percent against the dollar, and has fallen to its weakest level in more than three years.
Food and non-alcoholic beverages posted the biggest increase among the commodity groups, rising an annual 5.5 percent in January against 4.8 percent in December, data from the statistics agency showed. Food alone climbed 5.7 percent, compared with 5.0 percent the previous month.
Housing, water, electricity, gas and other fuels climbed an annual 3.5 percent, matching the rise seen in December.
Socioeconomic Planning Chief Arsenio Balisacan said on Wednesday inflation could average 4.4 percent this year, still within the central bank's 3-5 percent target range.
Tetangco said the central bank was watching to see if price pressures were brewing from movements in financial markets.
On Monday, Tetangco told Reuters the central bank will not resort to "drastic policy action" to stem the peso's slide, but it will be present in the foreign exchange market to smoothen sharp swings in the currency.
Authorities have said the peso could regain ground once investors get more clarity on the pace and direction of the US Federal Reserve's policy.
Super-easy US policy had spurred a flow of cash into emerging markets in recent years. But with the Fed now trimming its bond purchases, those flows have reversed in recent months, leading to bouts of high volatility.
In response, several emerging market central banks like Turkey, South Africa and India, lifted interest rates sharply in a bid to stem the selling of their currencies.
Tetangco expected the Philippines to be one of the emerging economies to benefit once investors find their nerve.
"Because EMEs (emerging market economies) are now considered a distinct asset class, and nearly all global investment models include EMEs in them, it is reasonable to expect that a significant portion of these flows out of EMEs would return, but to the EMs with better fundamentals," Tetangco told Reuters in an e-mailed reply to questions.
"We expect that as investors discriminate, some divergence among EMEs would ensue and that the Philippines would likely benefit," Tetangco said.
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