BSP sees inflation peaking in second or third quarter, sets target at 4-5% for March

MANILA, Philippines – Monetary authorities expect inflation to peak either in the second or third quarter of the year as the Bangko Sentral ng Pilipinas (BSP) sees consumer prices in March averaging between four percent and five percent due to escalating global oil and food prices.

BSP Governor Amando M. Tetangco Jr. said in a text message to reporters that the uptrend in inflation would continue in the near term as the volatility in the price of oil in the world market as well as the prices of food in the domestic market would wipe out the dampening effect of the strong peso on consumer prices.

“Volatility in the international price of oil and increases in domestic prices of food products may have offset the price dampening effect of the peso appreciation,” Tetangco stressed.

He pointed out that the expected uptrend in inflation in the near term was already taken into consideration by the central bank when it decided last Thursday to raise interest rates by 25 basis points after keeping policy rates at record lows for 20 months dating back in July 2009.

The BSP slashed key policy rates by 200 basis points between December 2008 to July 2009 to cushion the impact of the global financial crisis on the domestic economy. The central bank managed to keep the rates at record lows for 14 straight policy rate setting meetings since July 2009 due to benign inflation outlook and strong economic growth.

With the rate hike, the overnight borrowing rate now stands at 4.25 percent from a record low four percent while the overnight lending rate is now at 6.25 percent from six percent.

Monetary authorities now expect this year’s inflation to fall within the three percent to five percent target set by the BSP because of the central bank’s tightening action.

“The move (rate hike) was preemptive so as to ensure inflation expectations remain anchored,” the BSP chief explained.

Had it not for the tightening action, the central bank’s inflation forecast would have gone up to 5.18 percent instead of the Feb.10 forecast of 4.4 percent for 2011.

Inflation kicked up to a nine-month high of 4.3 percent in February from 3.6 percent in January exceeding the forecast of three percent to 4.1 percent set by the BSP. Inflation averaged 3.9 percent in the first two months of the year from 4.2 percent in the same period last year amid the rising oil and food prices in the world market.

Tetangco said monetary authorities expect inflation to ease after peaking between the second quarter and the third quarter of the year.

“Going forward, we expect inflation to taper off after possibly hitting a peak either in the second quarter or third quarter,” he added.

He added that the country’s resilient economy could absorb a 25 basis point rise in interest rates.

“Buoyant domestic demand conditions provide room for a policy interest rate hike without affecting the country’s economic growth prospects,” Tetangco said.

BSP Deputy Governor Diwa Guinigundo said the other day that the country’s resilient economy could absorb a 25 basis point rise in interest rate and would not affect the growth prospects of the Philippines.

“On the contrary, it will provide confidence in the market that the BSP is serious in providing price stability,” Guinigundo said.

Monetary authorities now assume oil price to average between $100 per barrel and $110 per barrel instead of the previous assumption of $85 per barrel to $95 per barrel due to the tensions in the Middle East and North African (MENA) states and took into consideration second round effects due to clamor for higher wages and petitions for transport fare increases. –Lawrence Agcaoili (The Philippine Star)