DBS Bank lowers Phl inflation forecasts

MANILA, Philippines – Singapore-based DBS Bank Ltd. has lowered its inflation forecasts for the Philippines this year and next as consumer prices remained benign over the past few months on the back of sluggish economic growth in advanced economies led by the US, as well as the sovereign debt concerns in Europe.

DBS economist Eugene Leow said in their Asia 2011-2012 Quarterly Cyclical Outlook that the investment bank has scaled down its inflation forecast to 4.9 percent instead of 5.3 percent this year and to 4.7 percent instead of 5.2 percent next year.

“Inflation for 2011 and 2012 is revised down to 4.9 percent and 4.7 percent respectively,” Leow stressed.

Latest baseline forecasts continued to indicate that average annual inflation would likely settle within the target of 3-5 percent set by the Bangko Sentral ng Pilipinas (BSP) for 2011 to 2013 as inflation expectations remain firmly anchored given the moderating commodity prices and the recent string of stable inflation rates.

Inflation eased to a four-month low of 4.3 percent in August from 4.6 percent in June and the BSP now expects consumer prices to fall within its 3-5 percent target. Inflation averaged 4.3 percent in the eight months of the year from 4.2 percent in the same period last year.

Monetary authorities also decided to slash anew the central bank’s inflation forecasts for this year and next due to lower than expected actual inflation for the months of July and August, as well as lower global economic growth.

The BSP’s Monetary Board lowered the inflation forecast to 4.46 percent instead of 4.7 percent this year and to 3.4 percent instead of 3.74 percent next year.

As inflation would likely fall within the BSP target, Leow pointed out that monetary authorities could afford to avoid further tightening in the short term but would likely raise interest rates by 50 basis points in the first half of 2012 due to price pressures.

“We see no further rate hikes for the rest of the year. However, with the credit cycle still in an upswing, price pressures should materialize in early 2012. We see one 25 basis point rate hike each in the first quarter and second quarter of 2012,” Leow explained.

Last Sept. 8, the Monetary Board left key interest rates unchanged for the third consecutive policy rate-setting meeting on the back of the lower- than-expected economic growth in the second quarter of the year as well as the benign inflation outlook amid stable oil and food prices in the world market.

The BSP decided to keep its overnight borrowing rate unchanged at 4.50 percent and its ovenight lending rate at 6.50 percent, and maintained the reserve requirement ratio for banks at 21 percent.

Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend. Required reserves consist of two forms: regular or statutory reserves and liquidity reserves. –Lawrence Agcaoili (The Philippine Star)