(STAR) By Des Ferriols - Inflation eased to its lowest level in two years in August, dropping to 6.3 percent due mainly to a slowdown in energy prices, the National Statistics Office (NSO) reported yesterday.

The August figure was the sixth straight month inflation has fallen and was the lowest since June 2004, when it hit 5.4 percent.

Analysts had forecast August inflation at 6.1 to 6.5 percent, while the Bangko Sentral ng Pilipinas (BSP) figure was 5.8 percent to 6.5 percent.

The latest inflation figure marked a sharp decline from the August 2005 figure of 7.2 percent.

The NSO said the August inflation rate brought the average rate for the first eight months of the year to 6.9 percent, well within the projected range of 6.7 percent to 7.2 percent for the whole of 2006.

The BSP said the August inflation rate was in line with expectations and central bank governor Amando M. Tetangco said prices would continue to ease as expected for the remainder of the year.

"The August rate is further evidence that inflation is on a downtrend which in turn provides support to our expectation that it would hit the 4-5 percent target by 2007," Tetangco said.

Excluding selected food and energy items, core inflation continued to decelerate at 5.3 percent in August from 5.4 percent in July.

Core inflation, which excludes certain volatile items of food and energy, slowed to 5.3 percent in August from 5.4 percent in July, the statistics office said.

The NSO said slowdowns in the annual inflation rates in all the commodity groups except for food, beverages and tobacco (FBT) lowered the year-on-year inflation in the National Capital Region (NCR) to 6.9 percent in August from 7.1 percent in July. The average rate outside the capital was even slower at six percent.

Despite the evident slowdown, however, Tetangco said there are still upside risks particularly in relations to geo-political tensions that could push global oil prices up for another round of increases

The BSP had earlier projected the August inflation to ease to 5.8-6.9 percent as the peso continued to strengthen while energy prices decelerated and sufficient food supply eased the pressure on domestic food prices.

Tetangco said the BSPís August projection bolstered the full-year expectation of a declining inflation rate in the second semester of the year after prices surged early in the first quarter.

"Inflation is expected to be lower than the July figure due to the continued firmness of the peso and lower food prices," Tetangco said.

Tetangco said prices in August appeared to support the second semester slowdown that was critical for meeting the inflation target in 2007, pegged also at 4-5 percent with domestic liquidity growth capped at 14 percent for the whole year.

Talks of monetary tightening have subsided but have been replaced by floating ideas that the BSP should now start considering the possibility of easing its current monetary stance, supposedly to encourage bank lending.

According to Tetangco, however, discussing that possibility was premature since the trajectory towards the 4-5 percent inflation target for 2007 has not been clearly established.

"It hasnít had enough time to show a clear trajectory, we will have to see in the coming months and if we see the kind of clarity that would satisfy the monetary board then we can maybe begin discussing that," Tetangco said.

The central bankís policy rates have been held steady at 7.50 percent for overnight borrowing and 9.75 percent for overnight lending since October last year.

The BSP has repeatedly said that lowering interest rates would become relevant only when the average national inflation rate has gone down to four to five percent but easing of monetary policies could come earlier.

Chief News Editor: Sol Jose Vanzi

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