HONG KONG (Dow Jones) – Supportive monetary policy can boost domestic demand and confidence in the economy, Bangko Sentral ng Pilipinas Governor Amando Tetangco said, noting the global economy seems to be tipping towards a further slowdown.

In written responses to questions from Dow Jones Newswires, Tetangco said average annual inflation rates in the Philippines were likely to fall within the lower half of the Bangko Sentral ng Pilipinas' 3%-5% target range through the end of 2013.

However, he noted there were also upside risks to inflation, in particular linked to sustained capital inflows and volatility in global oil prices.

The National Statistics Office disclosed yesterday that inflation decelerated to 13 month low of 3.9 percent in January compared to 4.2 percent the month before

"Amidst continued uncertainty in the global economic environment, the Philippine economy is likely to face external headwinds in 2012," Tetangco said.

"While the strength of domestic spending can help offset the weaknesses in external demand, a supportive monetary policy stance can help sustain domestic demand and bolster confidence in the economy."

The comments from Tetangco may indicate he is inclining towards additional monetary easing.

In January, the Philippine central bank cut its overnight rate by 25 basis points to 4.25%, having twice raised it in the first half of 2011 as part of a "normalization" process. From 2008, the BSP slashed rates by a total of 200 basis points to support the economy amid the global financial crisis.

The central bank announced Friday it would cut the banks' reserve requirement ratio by three percentage points to 18%, effective April 6, to offset various operational adjustments.

Tetangco said the changes were aimed at simplifying the central bank's reserve requirement regime and ensuring there was adequate liquidity to support economic growth, "especially given the prevailing weak global economic conditions."

The governor also said he expected the Philippines to score a rating upgrade from a major credit rating agency this year.

Fitch Ratings rates the Southeast Asian nation BB+, while Moody's Investors Service rates it Ba2, both with stable outlooks. Standard & Poor's Ratings Services ranks it BB and raised the outlook on the rating to positive in December.

"The fiscal space plus the monetary policy space that the current manageable inflation outlook affords us should hopefully translate to sustained and higher growth," Tetangco said.