(STAR) By Des Ferriols - Consumer prices went up by 7.1 percent in January, the slowest growth rate in 10 months, as the country’s economic activity felt the pinch of a sharp drop in consumer demand due to the global financial crisis.

The National Statistics Office (NSO) said prices grew by a slower pace than the eight-percent rate recorded in December and extended a downtrend that started in September last year.

The January inflation rate, however, is still within the seven to 7.9- percent range set by the Bangko Sentral ng Pilipinas (BSP).

BSP Governor Amando M. Tetangco Jr. said the decline in the nationwide inflation rate gave the BSP even more room to support the economy.

“This confirms our expectation for a continued slowdown in price increases,” Tetangco said. “It gives the BSP more room to support the economy and ensure that there is sufficient liquidity for the efficient working of the financial markets.”

Anticipating the decline, the central bank has cut its key interest rates by a total of one percentage point over the past two months to loosen credit and stimulate economic activity even as businesses cut more than 15,000 jobs amid depressed global demand for Filipino exports.

“We will continue to closely monitor developments so that our policy settings remain responsive to evolving scenarios,” Tetangco said.

The slowing inflation rate has already given monetary officials enough room for a 50-basis point cut in its key policy rates last month.

The sustained drop in the prices of volatile items in the consumer price index spurred expectations of further monetary easing in the next few months to bring the policy rates down to the lowest level in history.

The NSO said the headline inflation rate came down as a result of the decline in the prices of fuel, light and water along with deceleration of price increases in all the other commodity groups.

Excluding selected food and energy items, the NSO said the core inflation further slipped to 6.9 percent in January from 7.3 percent in December.

The NSO said the annual inflation rate in the National Capital Region (NCR) likewise further eased to 4.3 percent in January from 4.5 percent in December because of the decline in fuel, light and water.

Prices in areas outside the capital were also softer last month, with the inflation rate going down to 8.3 percent in January from 9.6 percent in December.

“The expected further slowdown in inflation would have been due to lower domestic oil prices and the peso’s strengthening during the month,” said Tetangco who is in Kuala Lumpur for the South East Asian Central Bankers governors’ meeting.

However, Tetangco said the slowdown could also be tempered by increases in the prices of major food items such as pork that was traced to increased seasonal demand.

“The BSP will continue to closely monitor price developments to ensure our policy settings are responsive to evolving scenarios,” he said.

Last year, the BSP hiked its key policy rates by a total of 100 basis points as inflation rate rose to over 12 percent because of rising oil prices and the consequent adjustment of wages and transport fare rates.

By December, however, the BSP had started to ease its monetary policies, cutting the key rates by 50 basis points, lowering its overnight borrowing rates to 5.5 percent and its overnight lending rates to 7.5 percent in an effort to stimulate the economy.

Based on the BSP’s projections, deputy governor Diwa Guinigundo said the downside risks to inflation appeared dominant against upside risks at this point, indicating that inflation rate would continue to drop throughout the year.

“Even core inflation is coming down and that means the demand-side pressures are also easing,” Guinigundo said.

According to Guinigundo, the BSP saw upside pressures on inflation to come from the utilities sector where rates could be adjusted upwards, particularly in water and energy bills.

Guinigundo said the state-owned National Transmission Corporation (TRANSCO) had a pending request for an adjustment in transmission rates and the water sector was also asking for a similar adjustment.

But Guinigundo said that with the decline in oil prices, these adjustments might no longer be necessary, thus removing further pressure on the prices of basic commodities.

“There is less ground for utility firms to ask for adjustments if oil prices would remain steady,” Guinigundo said.

On the other hand, Guinigundo said there were more compelling reason for the inflation rate to continue going down, particularly the steady decline in oil prices and the improvement in food supply which supported the stabilization of food prices.

“The global slowdown is also a factor that would ease demand and therefore support lower inflation all around,” Guinigundo added. “Fortunately, the foreign exchange rate is also not adding more pressure because it is steady also.”

Chief News Editor: Sol Jose Vanzi

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