Manila: Oil price surge worries BSP

Analysts said these concerns--on top of risks from the severe dry spell earlier this year--would increase the probability that the Bangko Sentral ng Pilipinas (BSP) would keep its interest rates steady during its next monetary policy-setting meeting in October even as the US Federal Reserve is widely expected to cut its own rates this week.

"It is quite clear that the outlook on inflation continues to be begin and the risks continue to moderate because you have monetary growth remaining at below 20 percent," BSP Deputy Governor Diwa Guinigundo said.

Excess money supply tends to exert upward pressure on the prices of basic goods as consumers are usually tempted to spend more when they have more cash in their pockets.

"But oil prices are becoming a concern," Guinigundo said, noting the rise in prices to about $72 a barrel for the benchmark Dubai crude.

US crude oil traded above a record $80 a barrel last week as a hurricane threatened refineries in the Gulf of Mexico.

"Definitely, it will have an impact on inflation, not immediately in September because they [oil companies] still have inventory," Guinigundo said.

The impact of the recent surge in oil prices, he said, would likely be felt starting October.

"Of course, what we're hoping to happen is that with the decision of OPEC[Organization of Petroleum Exporting Countries] to pump more, there could be some room for stabilization," Guinigundo said.

"But there's a downside risk again because there's going to be a hurricane in Texas. And then, of course there's still continuing risk aversion," he said.

Across the globe, investors are avoiding assets from emerging markets like the Philippines given the worsening credit crunch in the United States due to rising delinquencies in subprime mortgages.

The US Fed, which has given assurance that it will protect the US economy from recession, is thus expected to cut rates by at least 25 basis points this week to help ease the credit crunch.

In the case of the Philippines, Guinigundo said the BSP was expected to contain the country's annual inflation rate this year below 3.1 percent despite the upsurge in oil prices and the adverse impact of the prolonged dry spell on farm output.

 - By Doris Dumlao

Philippine Daily Inquirer

 Publication Date: 17-09-2007