Think tank says inflation scare overblown

MANILA, Philippines – Metrobank’s First Metro Investments Corp. (FMIC) as well as the University of Asia and the Pacific (UA&P) said the inflation scare is overblown and that the Bangko Sentral ng Pilipinas (BSP) is likely to keep interest rates at record lows in the first half of the year.

In a report, FMIC and UA&P see lower oil prices, cheaper power rates, and steady supply of rice in the coming months.

“We think that the inflation scare is overblown, given that rice stocks are plentiful, harvests are quite promising according to Department of Agriculture experts, and crude oil prices are likely to ease with the off-winter season and the eventual return of 200,000 barrels per day crude from Alaska which was closed late last year due to an explosion” the report stated.

The investment bank and think tank added that power distributor Manila Electric Co. (Meralco) is set to impose cheaper rates for January and February this year.

It said inflation would likely average at 3.1 percent in the first four months of the year. Inflation kicked up to a four-month high of 3.5 percent in January from three percent in December.

“There have been some concerns about possible inflation acceleration due to the continuous upswing in crude oil and other commodity prices, as well as projected increases in toll fees, transportation rates, and wheat and corn prices. However, with winter ending, crude oil price up swing will likely take a pause, while food prices may be kept in check by stable rice prices due to its abundant supply,” FMIC and UA&P said.

The BSP has set an inflation target of three percent to five percent between 2011 and 2014 but expects inflation to average at 3.6 percent this year and three percent next year amid the stronger-than-expected gross domestic product (GDP) growth of 7.5 percent last year.

“Since we do not expect a sharp rise in inflation in the first half, we also do not think the BSP will raise policy rates in the first half of the year, despite robust GDP growth. This is because inflationary forces should remain in check believe that inflation has already peaked this year and is set to fall below four percent in the fourth quarter of the year,” the study said.

Benign and manageable inflation has allowed the BSP’s Monetary Board to keep its key policy rates unchanged for 13 straight policy setting meetings since July 2009 minimizing the adverse impact of the global financial crisis on the domestic economy. The body slashed its key policy rates by 200 basis points between December 2008 to July 2009 bringing the overnight borrowing rate to a record low four percent and the overnight lending rate at six percent. –Lawrence Agcaoili (The Philippine Star)