Inflation seen rising to a peak of 15.4% in Q2 next year

MANILA, Philippines – Japanese-owned Nomura International (HK) Ltd. sees inflation rising fastest in the Philippines, peaking to 15.4 percent in the second quarter of next year in case commodity prices rise 10 percent this year and by five percent next year.

In its latest Asia Economics Weekly entitled “Modelling Asian Inflation,” Nomura said inflation in the Philippines would rise steadily from 6.1 percent in the second quarter of the year to nine percent in the third, 11.9 percent in the fourth quarter, 14 percent in the first quarter of next year, and to 15.4 percent in the second quarter.

Nomura said inflation would ease to 15.1 percent in the third quarter of next year and finally to 15 percent in fourth quarter.

“Inflation would rise most in the Philippines, least in Taiwan,” Nomura stressed.

Inflation in Taiwan is expected to rise from 1.5 percent in the second quarter of the year to 1.8 percent in the third quarter and peak at 2.1 percent in the fourth quarter before easing to 1.7 percent in the first quarter of next year, to 1.5 percent, and to 1.4 percent in the third and fourth quarters of next year.

Consumer prices are also expected to rise in Hong Kong, Malaysia and Thailand, but would stay within single-digit levels in 2011 and 2012.

“But most striking is how fast it would rise in Hong Kong, Malaysia, Thailand and especially the Philippines. Again, Taiwan bucks the trend. In practice, our models are ignoring the dis-inflationary effects from margin compression and a slump in real wage growth,” the Japanese investment bank said.

Aside from the Philippines, inflation is expected to hit double-digit levels in India and Indonesia. Inflation in India is expected to rise steadily from 9.7 percent in the second quarter to 12 percent in the third before peaking at 13.3 percent in the fourth quarter and first quarter of next year and easing to 12.9 percent in the second, 12.2 percent in the third, and 11.4 percent in the fourth quarter of next year.

On the other hand, inflation in Indonesia would increase from nine percent in the second quarter to 11.6 percent in the third, 13.3 percent in the fourth and peak at 13.7 percent in the first quarter of next year before easing to 13.5 percent in the second, 13 percent in the third, and 12.4 percent in the fourth quarter of next year.

“Inflation would remain over seven percent in China for three consecutive quarters and would be in double-digits in India, Indonesia and the Philippines,” it added.

In the inflation scenario, Nomura said it assumed that commodity prices would continue to surge rising 10 percent quarter-on-quarter in the second, third, and fourth quarters of the year and by five percent per quarter next year.

“Some countries are highly vulnerable to commodity prices and/or have relatively weak economic fundamentals – in our view, India, Korea, Thailand, Vietnam and the Philippines fit this bill. Central banks in such countries face the dilemma of weakening growth and worsening current account and fiscal positions, but surging inflation,” it said.

Nomura warned that countries highly vulnerable to commodity prices could face capital flight and currency depreciation if their central banks fail to raise interest rates.

The Bangko Sentral ng Pilipinas (BSP) raised interest rates by 25 basis points last March 24 as a preemptive move to keep inflation expectations well anchored amid escalating global oil and food prices. The central bank admitted that its inflation target of 3-5 percent to five percent this year was already at risk.

In another scenario wherein commodity prices would fall by five percent quarter on quarter staring the second quarter to the fourth quarter of the year and then rise five percent per quarter next year, Nomura said inflation in the Philippines would peak at 4.5 percent in the second and third quarter before easing to 3.7 percent in the fourth, 2.8 percent in the first and second quarters of next year, 2.7 percent in the third, and increasing to 4.1 percent in the fourth quarter of next year.

“Another is that the easing of inflation could lessen concerns about policy tightening and margin squeeze, buoying equity markets and portfolio inflows. This could invoke strong pressure on Asian currencies to appreciate (or depreciate in Hong Kong due to the peg), increasing the reluctance of central banks to raise rates, which in real terms would still be very low,” it said.

However, Nomura said inflation this year would likely average 6.1 percent and 6.4 percent next year from 3.8 percent last year. It also expects the BSP’s Monetary Board to raise interest rates by 100 basis points this year, bringing the overnight borrowing rate to five percent and the overnight lending rate at seven percent.

“We continue to see inflation accelerating for several reasons, including elevated oil prices and building wage pressures. We maintain our forecast of a total of 100 basis point of hikes this year, in line with our inflation forecast of 6.1 percent for 2011,” the Japanese investment bank said. –Lawrence Agcaoili (The Philippine Star)