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UPDATE 2-Philippine inflation hits 2-year high, limits room for more rate cuts

* Jan CPI up 4.2% vs 3.5% forecast in Reuters poll

* Inflation breaches c.bank’s forecast for January

* Projected inflation uptrend is temporary -cbank governor (Adds central bank governor’s comments)

MANILA, Feb 5 (Reuters) - Philippine annual inflation accelerated faster than expected to hit the highest level in two years in January, limiting the central bank’s room for further interest rate cuts to support the pandemic-hit economy.

The Bangko Sentral ng Pilipinas (BSP), which has pursued an accommodative monetary stance to help spur economic recovery, said on Friday an inflation uptick in the first half should be transitory. BSP holds its first 2021 policy meeting on Feb. 11.

The Consumer Price Index rose 4.2% in January from a year earlier, driven mainly by the heavily-weighted food and non-alcoholic beverages index, the Philippine Statistics Authority said on Friday.

Headline inflation, which was the highest since January 2019, beat the median forecast of 3.5% in a Reuters poll and was outside BSP’s projected range of 3.3%-4.1% for the month and the full-year target of 2%-4%. Core inflation, which excludes volatile food and fuel prices, was 3.4%, up from 3.3% in December.

Central bank governor Benjamin Diokno told reporters a projected uptrend in inflation should be “temporary”.

“The sources of near-term inflation pressures are supply-side shocks in nature that should not require a monetary policy response unless they lead to further second-round effects.”

Inflation for food and non-alcoholic beverages was 6.2% in January, at a time when pork prices soared due to a supply crunch caused by African swine fever outbreaks.

“Cutting (the policy rate) is already out of the question in the first half, maybe extending it in Q3,” said Emilio Neri, economist at Bank of the Philippine Islands, noting that a rate hike was now also “a possibility”.

The policy rate is currently at a record low of 2% following cuts totalling 200 basis points last year, when the economy suffered a record contraction.

“We expect BSP to refrain from adjusting policy in the near term,” said ING senior economist Nicholas Mapa, adding the next move could be a rate hike though this was unlikely to happen in 2021 or even next year. (Reporting by Neil Jerome Morales, Enrico Dela Cruz and Karen Lema Editing by Ed Davies)

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