MANILA, MAY 5, 2007 (STAR) By Des Ferriols - The nationwide inflation rate inched up to 2.3 percent in April, ending a 12-month downtrend that had seen inflation hit a 20-year low of 2.2 percent in March, the National Statistics Office (NSO) reported yesterday.

Despite the slight uptick, the April inflation rate was still an improvement over the 7.1-percent rate posted in the same period last year.

BSP Governor Amando M. Tetangco Jr. said that despite the slight rise, "the overall inflation outlook remains favorable."

The April figure was well within the two to 2.7 percent level projected by the BSP and the 2.2 to 2.7 percent level forecast by several economists.

Inflation in the first four months of the year stood at an average rate of 2.8 percent, well below the governmentís target of four to five percent inflation for the whole year.

Month on month, consumer prices in April were up 0.2 percent, after registering a 0.1 percent drop in March from February.

The BSP chief earlier said the full-year inflation rate could be lower than the governmentís target, given the trend since the start of the year and efforts to curb the inflationary impact of a surge in liquidity due to the strong inflow of remittances from overseas Filipinos workers (OFWs).

"The challenge of high liquidity will be addressed by our additional monetary tools, which will take effect on May 10," Tetangco said.

"The relatively benign inflation numbers provide some room for the BSP to maintain loose monetary conditions despite rapid money supply growth," said Frederic Neumann, an economist at HSBC Holdings PLC in Hong Kong.

The BSP will take deposits from pension funds and insurers starting May 10 to absorb money that might otherwise fan inflation amid campaigning for May 14 national elections and record amounts of cash being sent home by OFWs.

Inflation rate in the National Capital Region (NCR) was 2.1 percent in April, the same rate recorded in March. On the other hand, the inflation rate in Areas Outside the National Capital Region (AONCR) increased to 2.4 percent in April from 2.3 percent in March.

According to Tetangco, the April result also confirmed BSPís expectation that inflation rate would start moving up slightly in the second quarter as the base-effect of the revised value-added tax rate started to diminish.

While domestic liquidity continued to grow rapidly, the BSP has refused to ease its headline overnight borrowing rate of 7.5 percent and its lending rate of 9.75 percent.

The BSP decided to take steps to arrest the rapid growth in money supply, setting moves to mop up liquidity from the system by luring government deposits away from banks.

The new measures, according to the BSP, are expected to ultimately slowdown the growth in domestic liquidity to below 20 percent, a level that the central bank said it considered "sustainable and not inflationary".

"We think that all our policy settings at this time are still appropriate," Tetangco said. "The recent price developments are consistent with the BSP and the marketís expectations of a generally benign inflation outlook."

However, Tetangco said the MB is still concerned over the strength of monetary growth which could build up inflationary pressures over the medium term.

To address the potential risks, Tetangco said the MB has decided to encourage government owned and controlled corporations especially the Government Service Insurance System (GSIS) and the Social Security System (SSS) to deposit their funds with the BSP.

The BSP has also allowed the trust department of banks as well as non-banking institutions with quasi-banking functions to avail of the BSPís special deposit account (SDA) facility.

The BSP also allowed the SDAs of banks to be counted as alternative compliance with the liquidity floor requirements for government deposits. ó With AFP

Chief News Editor: Sol Jose Vanzi

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