Inflation seen picking up to 4.1% this year

MANILA, Philippines – Swiss-owned investment bank UBS sees the country’s inflation picking up to 4.1 percent this year and 4.6 percent next year.

In a report, UBS economist Edward Teather said Bangko Sentral ng Pilipinas (BSP) would adjust upwards the overnight borrowing and overnight lending rates as average inflation would pick up this year from 3.8 percent last year.

“Administered and other price increases, some arguably delayed from last year, suggest inflation momentum and inflation surprises may shift to the upside. This may hasten the start to policy normalisation, but we do not expect a serious shock to growth as inflation expectations are not elevated, balance sheets are strong and credit growth moderate.” Teather stated in the report.

He pointed out that upside inflation surprises usually occur in the face of accelerating inflation as pump prices of petroleum prices went up by four percent to six percent last December, the toll rate hike, increase in the flagdown rate of taxis, rising bread and sugar prices as well as the 10 percent hike in electricity rates.

The economist explained that the inflation forecast of UBS was well within the three percent to five percent target set by the BSP for 2011 to 2014.

However, he said the investment bank’s inflation forecast was higher than BSP’s projections of 3.6 percent for 2011 and three percent for 2012.

“The good news is that consensus inflation expectations are already in a similar position, and that this variation would still be within the BSP’s target range. This means that while the BSP should respond, the central bank need not move too aggressively tighten and could probably could even wait a few months before appearing behind the curve,” Teather said.

The BSP’s Monetary Board slashed its key policy rates by 200 basis points between November of 2008 to July 2009 to cushion the impact of the global financial crisis on the domestic economy. The BSP kept its key policy rates at record lows of four percent for the overnight borrowing rate and six percent for the overnight lending rate for 13 straight policy meetings.

As a result, the Philippines avoided recession after its domestic output as measured by the gross domestic product (GDP) expanded by 1.1 percent in 2009 from 3.8 percent in 2008. In the first nine months of 2010, the country’s GDP growth zoomed to 7.5 percent from 0.7 percent in the same period in 2009.

Economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) see the country’s GDP growing between six percent and eight percent this year from a range of five percent to six percent last year.

Teather said the BSP would likely jack up its key policy rates by 100 basis points staring the second quarter of the year.

“We doubt the BSP will allow itself to fall behind the curve and project policy rate increases of 100 basis points this year in 25 basis-point steps possibly in conjunction with reserve ratio increases, starting in the second quarter of the year.

Earlier, BSP Governor Amando Tetangco Jr. described 2011 as a promising and critical year as it marks the beginning of a new decade with the country’s economic growth gaining traction while advanced economies including the US and Europe continue to struggle.

“2011 for me is a year of promise. The worst effects of the global economic and financial crisis are now behind us,” Tetangco said.

He cited the improvements in the global and domestic economic fronts, a manageable inflation environment, healthy credit growth, favorable external payments dynamics, quality improvements in the financial system as well as monetary and banking reforms.

“2011 is the beginning of a new decade. It is also a critical year that could spell whether we would be able to press on the road to sustained strong recovery,” the BSP chief added. –Lawrence Agcaoili (The Philippine Star)