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Philippine Bonds Drop as Faster Inflation Limits Rate-Cut Odds

Philippine government bonds declined after a government report showed inflation was faster than economists predicted, giving the central bank limited room to cut interest rates from a record low.

Consumer prices climbed 3.2 percent in July from a year earlier, compared with 2.8 percent in June, the statistics office reported today. The median estimate in a Bloomberg News survey was for a 3.1 percent increase. The peso gained as markets reopened after being closed yesterday due to flash flooding in Manila that killed at least 15 people.

“The CPI print is mildly disappointing, which explained the pullback in the bond market,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “The central bank may still have some room to cut but it’s not likely to be at the next meeting. They need to observe the impact.”

The yield on the 5 percent bonds due August 2018 rose 10 basis points, or 0.1 percentage point, to 4.70 percent as of 4:46 p.m. in Manila from Aug. 6, according to Tradition Financial Services.

The price gain is manageable and “bears watching” to see if it’s prolonged, Governor Amando Tetangco said today. Bangko Sentral ng Pilipinas lowered its overnight rate by 25 basis points to 3.75 percent on July 26. It forecasts inflation will average 3 percent to 5 percent from 2012 through 2014.

“While the latest inflation remains near the lower-end of BSP’s target, it reduces scope for another rate cut in the near term,” said Catherine Bautista, a senior trader of sovereign bonds at Union Bank of the Philippines in Manila. Policy makers next meet on Sept. 13.

The peso strengthened 0.1 percent to 41.79 per dollar from 41.84 on Aug. 6, according to Tullett Prebon Plc. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 6 percent.

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