Credit Suisse, HSBC see BSP inflation target breached this year

Published by rudy Date posted on April 7, 2011

MANILA, Philippines – Economists still see inflation breaching the higher end of the three percent to five percent target of the Bangko Sentral ng Pilipinas (BSP) within the next few months due to escalating global oil and food prices.

Credit Suisse vice president of emerging markets economic research Devika Mehndiratta said the country’s inflation would likely average 5.4 percent this year but clarified that inflation would not shoot up sharply just like in 2008.

“We don’t see inflation move up worryingly high the way it did in 2008 and hence rate increases are likely to come through only in tentative, unhurried moves,” Mehndiratta stressed.

Mehndiratta pointed out that the BSP would raise interest rates by another 75 basis points this year after key policy rates were increased by 25 basis points last March 24.

“We maintain our view that further rate hikes are likely to be tentative and unhurried,” the Credit Suisse official added.

The National Statistics Office (NSO) reported yesterday that inflation was steady at 4.3 percent in March from February as lower electricity rates offset the rise in fuel and food prices. Actual inflation was well within the four percent to five percent forecast set by BSP for the month of March.

“As in Thailand and Indonesia, food prices in Philippines came off after sharp rises earlier,” Mehndiratta said.

Prior to the release of the March inflation, the BSP raise interest rates by 25 basis points as a preemptive move to keep inflation expectations well anchored amid the rising global oil and food prices due to escalating tensions in Middle East and North African (MENA) states and the disaster in Japan.

This brought the overnight borrowing rate to 4.25 percent and the overnight lending rate to 6.25 percent. The rates were slashed by 200 basis points between December 2008 and July 2009 to a record low four percent for the overnight borrowing rate and to six percent for the overnight lending rate to cushion the impact of the global financial crisis on the domestic economy.

Monetary authorities managed to keep interest rates at record lows for 20 straight months since July 2009 due to the benign inflation outlook.

Sherman Chan, economist of British banking giant Hong Kong and Shanghai Banking Corp. (HSBC), said the recent run up in global and food prices would lead to further acceleration in inflation over the next six months.

“It is too early for the BSP to breathe a sigh of relief, as the recent run-up in global oil and food prices will trickle down the Philippine economy, leading to further acceleration in inflation over the next six months,” Chan stressed.

The economist explained that the BSP’s inflation target of 3.0 percent to 5.0 percent for 2011 would likely be breached in the second quarter of the year prompting the Monetary Board to raise interest rates by another 25 basis points on May 5.

“The battle against inflation is far from over, and we expect the BSP to continue tightening at the next meeting,” Chan added

HSBC believes that inflation would peak at 6.6 percent in October due to the continued spike in global oil prices as well as a continued surge in global food prices.

“To sustain its prudent image in monetary policy setting, we expect the BSP to deliver another 25 basis point hike at its next meeting on May 5, after kicking off its tightening cycle on March 24. That said, the latest inflation result also provides leeway for the central bank to sit tight, should developments in Japan further cloud the region’s growth outlook,” HSBC added. –Lawrence Agcaoili (The Philippine Star)

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