MANILA - Falling food prices has resulted in Philippine inflation dropping to its lowest level in two years, officials said, raising the prospect that interest rates will remain on hold.

The National Statistics Office said inflation slowed to an annual 6.4 percent in July, from 6.7 percent in June, at the lower end of the central bank's projected range of 6.3-7.0 percent. It was the lowest rate since June 2004 when it hit 5.4 percent and Bangko Sentral ng Pilipinas governor Amando Tetangco said the easing should allow monetary authorities to keep interest rates on hold.

"The lower inflation rate is consistent with the expected easing of price pressures. While this gives the (central bank) some room for maintaining the current monetary policy stance, there also continues to be upside risks to inflation which need to be closely monitored," he said in a statement.

Consumer prices were up 0.5 percent month-on-month in July, compared to a 0.7 percent rise in June. Core inflation, which excludes selected food and energy prices, eased to 5.4 percent last month from 5.8 percent in June.

The July figure brought inflation for the first seven months of the year to 7.0 percent compared to 7.1 percent in July 2005.

The BSP has kept its overnight borrowing rate at 7.50 percent and its overnight lending rate at 9.75 percent since October last year despite continuing monetary tightening in the United States.

"The possibility of domestic interest rates rising has declined after recent data pointing to a decelerating trend in inflation," said Lawrence de Leon of Accord Capital Equities.

DBS Economic Research said in a client note that the Philippine central bank is expected to keep interest rates steady for the rest of the year and may even cut them by the first quarter of 2007 amid easing the inflation environment.

"Slowing inflation has definitely been a plus for the central bank in that there's been less pressure for it to lift interest rates," DBS said.

"In fact with domestic demand remaining weak, the preferable policy is to cut interest rates.

"However, we believe this is unlikely to happen until the first quarter of 2007," the note added.*AFP

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