The Central Bank of the Philippines (BSP) said inflation is expected to remain within the bank's target range in the next two years, supported by well-contained inflation expectations and subdued global economic prospects that will temper upward pressures on commodity prices.
"Nonetheless, upside risks to the inflation outlook remain, including pending utility rate adjustments as well as the recent depreciation of the peso," the bank said.
The BSP held its benchmark overnight borrowing rate, or reverse repurchase facility rate, steady at 3.50 percent - unchanged since October 2012 - along with its overnight lending rate at 5.5 percent, and the SDA rate at 2.0 percent.
The decision to hold rates was widely expected following a statement last week by the bank governor who said there was "no urgency to change policy because inflation remains under control."
While keeping its main rates steady this year, the BSP has cut the SDA rate by 150 basis points to make it less attractive for foreign funds to park their money there, putting upward pressure on the peso. Last year the peso rose by almost 7 percent against the U.S. dollar.
But since early May, the peso and other emerging market currencies has come under pressure from capital outflows, dropping 7 percent against the U.S. dollar from May 10 to June 25. The lower peso tends to raise import prices, putting upward pressure on inflation.But since last June, the peso has bounced back and is now only down 5.4 percent since the start of the year, quoted at 41 peso to the U.S. dollar today.
In June the Philippine inflation rate rose slightly to 2.8 percent from 2.6 percent in May and April.
Last month the BSP also said inflation was expected to remain within the bank's target for 2013 and 2014 - 4.0 percent plus/minus one percentage point - and the 2015 target of 3.0 percent, plus/minus one percentage point.
In April the BSP forecast 2013 inflation of 3.3 percent.
The Philippine economy continues to be robust, the bank said, supported by domestic demand and buoyant market confidence, strong domestic liquidity and bank lending
Gross Domestic Product was up 2.2 percent in the first quarter from the fourth quarter for annual growth of 7.8 percent, the fastest rate since the second quarter of 2010. The government has forecast growth this year of 6-7 percent compared with 6.6 percent in 2012.