UPDATE 2-Philippine Sept inflation eases, boosting chance of rate cut

* Sept pace was 3.6 pct y/y, down from Aug's 3.8 pct

* Sept core inflation 3.8 pct y/y, Aug was 4.3 pct y/y

* Cbank has tools besides rates to contain inflows - gov

(Adds comments from c.bank governor, background)

By Karen Lema and Erik dela Cruz

MANILA, Oct 5 (Reuters) - Philippine inflation slowed in September, raising the odds of an interest rate cut late this month to support the economy and contain the strength of the peso, emerging Asia's best performing currency this year.

The central bank last reduced the key overnight borrowing rate

in July - by 25 basis points to a record low 3.75 percent - and economists believe that with inflation under control, policymakers have scope to ease policy further.

In September, headline inflation eased to 3.6 percent from a year earlier, from August's 3.8 percent pace. This brought the average on-year inflation rate in 2012's first nine months to 3.2 percent, near the bottom of the central bank's 3 to 5 target band for the full year.

Core inflation, which strips out some of the more volatile components including food, also slowed to 3.8 percent last month from August's 4.3 percent, while month-on-month inflation was down 0.1 percent.

"The inflation environment continues to be favourable, and that gives us space if there is a need to respond to global developments to ensure that economic growth continues without fuelling inflation," Bangko Sentral ng Pilipinas Governor Amando Tetangco told reporters at the sidelines of a business forum.

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INSTANT VIEWS on Sept inflation

TAKE A LOOK on Asian c. banks

TAKE A LOOK on Asian inflation

GRAPHIC on Philippine CPI, rates, GDP:

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WHICH RISK IS GREATER?

Tetangco told Reuters on Sept. 26 that any adjustment to the key policy rate would depend on whether the risk of inflation accelerating or if e conomic growth falling was greater.

Australia unexpectedly cut interest rates on Tuesday, and more cuts are likely given its bleak economic outlook. South Korea is also expected to ea se r ates this month to take advantage of benign inflation to support sagging growth.

Give n the Philippines' slower September inflation and the need to keep currency appreciation pressures in check, economists see an increasing likelihood the BSP - which kept rates steady last month - will cut them at its Oct. 25 meeting.

"It is becoming more likely the central bank will cut especially if the peso again continues to appreciate at this pace," said Jun Neri, economist at the Bank of the Philippine Islands.

Policymakers are optimistic growth will hit the higher end of a 5 to 6 percent target for 2012, after a 6.1 percent expansion in the first half, on robust domestic demand fuelled by remittances from Filipinos overseas and a growing business-process outsourcing sector.

These foreign exchange inflows, plus a strong influx of foreign capital, have helped make the peso the best performing currency among emerging Asian economies this year, with gains of nearly 6 percent so far this year.

While a strong currency can help moderate inflation, it also makes Philippine exports more expensive and it reduces the purchasing power of remittances received by families of Filipinos working abroad, therefore crimping growth.

But Tetangco is not unduly concerned, saying on Friday that the peso remains "competitive". He also reiterated the central bank has sufficient tools, other than the policy rate, to manage strong capital inflows.

"The domestic currency has generally maintained its competitiveness and the volatility has been just in line with the region," Tetangco said.

"The peso strength is largely fundamentally supported so official BSP action should only be to reduce excessive volatility in the real movements."

(Editing by Richard Borsuk)

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Keywords: PHILIPPINES ECONOMY/INFLATION