Inflation to rise by year-end as credit becomes tighter

The rise in consumer prices is expected to slow down to its lowest quarterly pace this year in September but it would gradually pick up as credit becomes tighter, the Bangko Sentral ng Pilipinas (BSP) said Friday.

In its quarterly inflation briefing, Diwa Guinigundo, BSP deputy governor, said inflation—which is the rate of increase in goods and services—is projected to dip to 1.3 percent in the third quarter.

Inflation during the last three months of 2008 was at 9.7 percent and the BSP expects that it would decelerate to 7 percent in the first quar­ter and to 3.5 percent in the second quarter this year.

The central bank official said the decline in oil prices, the lower-than-expected inflation figures for the fourth quarter last year, the base effects from the inflation uptrend in the first three quarters of 2008 and the impact of transport fare reductions would all contribute to the drop in inflation figures.

Concerns over prolonged and sharper economic downturn and sustained decline in oil demand by advanced economies have weighed down on international prices in the futures market, Guinigundo said.

But inflation is expected to pick up to 3.6 percent by fourth quarter.

“The dip will be in the third quarter and would average at 4.7 percent for 2010. We should be in inflation target in 2009 and 2010,” Guinigundo said.

By year-end, the BSP expects inflation would be at 3.9 percent and accelerate to 4.7 percent next year— an indication that the economy is already recovering.

This year, the central bank aims to contain inflation within 2.5 percent to 4.5 percent and 3.5 percent to 5.5 percent the following year.

Credit tightening

Cyd Amador, BSP managing director, said there would be a slight increase in the inflation path for 2010 due to expected moderate economic recovery.

However, another reason for the faster pace in inflation is that world rice prices are expected to climb this year as the tightening credit to farmers can potentially constrain production and demand for the grain in developing economies increases.

Other risks to inflation remain, including constraints to growth in global oil supply, higher electricity rates, foreign exchange market volatility and possible resurgence of food prices, she said.

Amador said credit could tighten in the near term as financial deleveraging continues and confidence in funding the market remains fragile.

An accommodative policy response may be appropriate to maintain confidence in the financial markets given that financial tensions could trigger credit provision mostly in the form of stringent documentation requirements, BSP said in its fourth quarter inflation report.

“The BSP has sufficient latitude to act preemptively in addressing the possible credit tightening and orderly functioning of the financial markets,” she said.

Easing monetary policy could alleviate the financial burden on firms and households and could help reduce banks’ delinquency and loan default problems that usually follow periods of slow growth.

“We are promoting an environment that the market liquidity is assured,” Guinigundo said. Last month, the BSP cut its overnight borrowing and lending rates by 50 basis points to 5 percent and 7 percent, respectively.

The central bank said it will ease its key interest rates, which is primarily intended to support economic growth. The country’s gross domestic product is expected fall within the range of 3.7 percent to 4.7 percent by year-end, slower than last year’s 4.6 percent last year. –Maricel E. Burgonio, Reporter, Manila Times