Inflation likely eased further this month to 10.3-11.2 percent year-on-year due to sharp declines in global food and fuel prices, the central bank, Bangko Sentral ng Pilipinas (BSP), said Thursday.

“The balance of risks favors a reading that would tend toward the lower end of the range, as rice and other food prices continued to decrease due to higher supply and favorable weather conditions,” BSP Governor Amando Tetangco Jr. said.

“International and domestic oil prices also sustained their decline, which resulted in the implementation of provisional reductions in public transport fares this month.”

Inflation as measured by the rise in the consumer price index was jacked up by soaring commodity prices in the earlier months. It peaked at 12.5 percent in August before softening to 11.8 percent in September and 11.2 percent in October.

But Tetangco said the upper end of the forecast range for November would likely come about because of the weakening peso as well as increases in utility charges.

A weaker peso tends to aggravate inflation by making importation more expensive. The Philippines is a net importer of oil and is also the world’s largest importer of rice.

According to its preliminary estimates, the BSP also expects inflation to ease to single-digit levels—9.8-9.9 percent—ahead of expectations, due to the sharp fall in global oil prices and a potential yearend peso rally against the US dollar.

Global oil prices have gone down to below $55 a barrel as recession worries sparked fresh fears over slowing global energy demand. In the middle of 2008, oil prices hit a record $147 a barrel.

The BSP also expects the local currency to firm up against the greenback on the back of heavy remittances from overseas Filipino workers during the Christmas season.

Although inflation appears to be letting up, analysts believe that the BSP must still wait for core inflation to decline before easing monetary policy through a cut in key interest rates.

“The BSP will probably wait for core inflation to go down before cutting interest rates,” Sun Life Financial Philippines chief investment officer Michael Manuel said in a briefing yesterday.

The country’s core inflation, which removes volatile items like food and fuel to get underlying price trends, rose to 7.8 percent in October year-on-year from 7.5 percent in September even as the headline inflation decelerated.

To minimize the impact of a global recession expected next year, the government would do well to increase fiscal spending rather than ease monetary policy, Manuel added.

“The impact of monetary policy is not direct and is not measurable, that’s why I always favor fiscal spending (as a way of pump-priming the economy),” he said.

The central bank recently slashed the reserve requirement by two percentage points to 19 percent of deposits and deposit substitutes. The cut released P60 billion into the financial system.

It then came as no surprise to the market when the central bank maintained its benchmark interest rate, the overnight borrowing rate, at 6.00 percent during its policy rate setting last week. Edited by INQUIRER.net