Inflation seen to have been faster in Feb.

A WEAKER PESO and increases in water rates, as well as prices of fuel and select food may have driven the inflation rate higher last month, the Bangko Sentral ng Pilipinas (BSP) said yesterday.

Still, economists polled earlier by BusinessWorld and yesterday by Reuters said they expect the Monetary Board to slash key rates by 25-50 basis point, as easing inflation allows monetary authorities to focus on spurring flagging economic activity.

BSP Governor Amando M. Tetangco, Jr. said inflation may have settled at 6.6%-7.5% last month, with the top end of the range higher than the 7.1% rate recorded in January.

"Increases in water rates, price increases in certain food items and gasoline, as well as moderate peso depreciation, could cause the final February inflation to fall within the higher end of this range," he said in a mobile "text" message to reporters yesterday.

Inflation peaked last year in August at 12.5%, before easing to 8% in December. Average inflation rate for 2008 was 9.3%.

The BSP will announce the official February inflation this Thursday, the same day of the Monetary Board’s rate-setting meeting.

At the same time, Mr. Tetangco said a month-on-month decline in inflation rate is still possible, given the reduction in public transport fares and roll-backs in diesel pump prices.

The central bank has said that easing inflation has given it room to ease monetary policy. The BSP has cut key interest rates by a total of 100 basis points since last December.

Projections of faster inflation has not dampened market expectations of a rate cut.

Rizal Commercial Banking Corp. Senior Vice-President for financial markets Marcelo E. Ayes maintained his position that the BSP will have no choice but to cut key interest rates.

"Between higher inflation and negative economic growth, the latter is more pressing," he said in a telephone interview yesterday.

"They have already announced that they have more room to cut rates, and since last year, the recession has been accelerating worldwide, he noted.

A bond trader who requested anonymity, likewise said the risk of higher inflation may not be the primary concern right now of the Monetary Board, "given that economic growth is at risk."

"It’s not going to dramatically affect the board’s decision," she said.

The BSP expects inflation to average between 2.5%-4.5% this year, with the rate bottoming out in the third quarter at around 1.3%, before accelerating slightly towards the end of the year. — Paolo Luis G. Montecillo with a report from Reuters