Barclays sees RP inflation rising to 5.4% this year

MANILA, Philippines – Investment bank Barclays Capital sees the country’s inflation rising to 5.4 percent this year from 3.2 percent last year on the back of higher oil prices and utility rates.

In a report, Barclays Capital economist Prakriti Sofat said the investment bank is sticking to its inflation forecast of 5.4 percent this year despite the fact that the Bangko Sentral ng Pilipinas (BSP) has raised its inflation projections for the country for this year and next year.

Last April 22, the BSP decided to adjust upwards its inflation forecast to 5.1 percent instead of 4.65 percent this year and to 3.7 percent instead of 3.45 percent next year as the balance of risk to consumer prices were tilted to the upside because of supply side factors.

Inflation forecast would still fall within the BSP target of 3.5 percent to 5.5 percent this year and three percent and five percent for 2011.

Inflation eased to 4.2 percent in the first quarter of the year from 6.9 percent in the same period last year. Inflation picked up to 4.4 percent in March from 4.2 percent in February on the back of rising clothing, fuel, light, and water as well as service prices.

However, monetary authorities believe that inflation could climb to as high as six percent either in June or July due to a possible wage increase, fare hike, and rising pump prices of petroleum products.

“This is more in line with our expectation of 5.4 percent. The central bank expects inflation to peak at 5.5 percent to six percent in June or July,” Sofat added.

She pointed out that the BSP still believes that the second round effects from high energy prices are manageable and inflation expectations remain well contained.

According to her, Barclays Capital said the BSP’s Monetary Board would likely tweak its key policy rates by the third quarter of the year.

“Although the central bank believes that upside risks to inflation have increased it will remain vigilant on inflation pressures, inflation expectations remain contained. BSP also remains concerned about the sustainability of the global recovery. Given this backdrop, we maintain our view that the first rate hike will materialise in the third quarter,” Sofat explained.

Monetary authorities slashed its key policy rates by 200 basis points between December 2008 and July 2009 to hit a record low of four percent for the overnight borrowing rate and six percent for the overnight lending rate. It has kept its policy rates unchanged for seven consecutive policy-setting meetings since July last year but has withdrawn some of the liquidity enhancing measures adopted since November of 2008.

Sofat said authorities are likely to jack up its key policy rates by 50 basis points this year bringing the overnight borrowing rate to 4.5 percent by year-end.–Lawrence Agcaoili (The Philippine Star)