Bank warns inflation yet to peak

THE Metropolitan Bank and Trust Co. said the higher-than-expected February inflation points to a higher overall curve that may peak toward the end of the year.

In a research note, Metrobank said price movements may hit the 5-percent mark in May and might peak at close to 8 percent in November.

“Of course, these are just preliminary numbers and we will have to evaluate these figures in comparison with the actual numbers as they come. However, a higher curve is hard to dismiss given that the spike in February just take into consideration the food and fuel inflation prior to the escalation of conflict in Libya and oil-price worries,” Marc Bautista, Metrobank research head, said.

While Saudi Arabia can easily fill the void left by Libyan oil, unrest spreading to the main suppliers belonging to the Organization of Petroleum Exporting Countries has spooked the market more than the actual conflict in Libya, the analyst said.

“It doesn’t look like these fears are abating any time soon, and the resulting prices will eventually feed into the inflation figures of the Philippines,” he said.

February inflation came in at a higher-than-expected 4.3 percent and surpassed the Bangko Sentral ng Pilipinas (BSP) forecast for the month.

“Indeed from the looks of it, the current inflation is driven by food items, and not by petroleum and energy items, as one might suspect given high global oil prices. Economists, however, already expect this given the robust demand [on the back of the stronger domestic economy] and a sluggish supply response to tightening market conditions,” Metrobank said.

It said price dynamics of food and oil will come into play in the coming months, albeit temporarily, as higher fuel prices and supply-driven pressures feed into generalized pricing behavior.

Metrobank said this will largely be evident in the movement of core inflation, which is an indicator of the underlying trend of consumer prices since it excludes the effect of temporary disturbances and shocks.

As of February, there are still no signs that second-round effects are starting to set in, as can be seen from the slower rise in the core inflation of 3.5 percent from 3.3 percent, the lender said.

“Since it has become a major activity already to guess when the BSP will start raising rates [and rising rates have been a long foregone conclusion], our take is that it will raise rates no later than May, perhaps even earlier if the March or April inflation figure shoots up further and breaches the annual band of 5 percent. We are still of the view that for the rest of the year, the overnight rates will be raised by 50 [basis points], followed by another 50 [basis points] increase in 2012,” Bautista said.

Should inflation accelerate, the BSP may frontload up to 75 basis points this year and 25 to 50 basis points in 2012, he said.
If oil issues are properly sorted out this year, then inflation may return to the 5 percent level toward 2012, he said.

“Again, it all depends on inflation expectations, rather than temporary blips in the inflation numbers. It remains to be seen though if the February 2011 surprise inflation figure was a temporary blip or not,” he added. –Lailany P. Gomez Reporter, Manila Times