Citigroup sees no double-digit inflation

MANILA, Philippines – US-based Citigroup has ruled out the possibility that inflation in the Philippines would hit double-digit levels — like what happened in 2008 — due to the steady rise in global oil prices.

Citigroup economist Jun Trinidad said in their recent Philippine Macro View report that the country’s inflation would likely peak at 6.5-7 percent this year.

“Ruling out a double-digit inflation scenario from persistently high oil prices — but headline inflation may peak at 6.5 percent to seven percent year-on-year,” Trinidad stressed.

The Bangko Sentral ng Pilipinas (BSP) has set an inflation target of three to five percent between 2011 and 2014. However, it raised its inflation forecast to 4.4 percent instead of 3.6 percent this year and to 3.5 percent instead of three percent next year due to the steady increase in global oil and food prices.

Latest data showed that inflation averaged 3.9 percent in the first two months of the year from 4.2 percent last year after the consumer price index kicked up to a nine-month high of 4.3 percent in February.

Actual inflation last month breached the BSP forecast of between three percent and 4.1 percent.

Trinided downplayed a repeat of a scenario in 2008 when the country’s inflation hit double digit levels due to higher oil and food prices.

Average inflation kicked up to 9.3 percent in 2008 from 2.8 percent in 2007 as inflation peaked at 12.5 percent in August 2008 due to surging oil and food prices.

“Unlike in the first half of 2008, lackluster food inflation prospects on the back of favourable local supply would help ease oil price pressures,” Trinidad added.

He explained that oil-based items account for 8.2 percent of the consumer price index basket with 2000 as base year.

“In line with downside risk to remittances and negative terms of trade effects, the inflation tax brought about by high oil prices in the near term would be a risk not just to consumption but to inflationary expectations as well,” the economist warned.

Trinidad said Citigroup sees inflation averaging 4.8 percent this year assuming an oil price of $100 per barrel or more in the near term and a weaker exchange rate of P44 to P45 per $1.

He added that the investment bank expects a gradual drift in oil prices to $100 per barrel in the second half of the year.

According to him, inflation would accelerate late in the second quarter to the third quarter of the year until it peaks at a range of 6.5 percent to seven percent later this year.

However, he warned that average inflation could breach the five percent level this year if food prices continue to rise as food accounts for more than 40 percent of the inflation basket.

“Since food accounts for more than 40 percent of the CPI basket, lackluster food price pressures on the back of strong fourth quarter 2010 harvest and favorable farm prospects may help ease inflation’s excessive up move,” he said.

As BSP Governor Amando Tetangco Jr. said earlier, Citigroup said the scope for keeping interest rates in the Philippines has narrowed and monetary authorities would likely jack up policy rates by as much as 50 basis points on March 24.

“We continue to believe the latest oil price episode and potential second round price effects heighten the likelihood for policymakers to accelerate rate tightening,” Trinidad said.

The investment bank sees policy rates higher by 100 basis points this year if oil prices average $100 per barrel and inflation averages five percent.

However, the rate could increase by as much as 150 basis points if second-round price effects intensify due to clamor for higher wages and supply disruption shocks.

The BSP slashed key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis. This brought the overnight borrowing rate to a record low four percent and the overnight lending rate at six percent. –Lawrence Agcaoili (The Philippine Star)