DBS hikes Phl inflation forecast to 5.6%

MANILA, Philippines – Singapore-based investment bank DBS has raised its Philippine inflation forecasts this year and next due to escalating global oil and commodity prices that would prompt the Bangko Sentral ng Pilipinas (BSP) to further raise interest rates this year.

In a research note, DBS hiked its inflation forecast to 5.6 percent instead of 4.4 percent this year and to 5.2 percent instead of 4.7 percent next year.

The investment bank said inflation rose quickly to 4.3 percent in February from 3.6 percent in January and is expected to further accelerate in the coming months.

It added that the BSP’s Monetary Board raised its inflation forecasts for 2011 and 2012 due to rising oil and food prices in the world market but would still fall within the central bank’s inflation target of 3-5 percent for 2011 to 2014.

“BSP is putting its 2011 and 2012 inflation forecasts under review, and takes the view that the global recovery is confirmed,” DBS added.

The BSP now expects this year’s inflation to be higher than 4.4 percent but would still be within the higher end of the target of five percent but it lowered next year’s inflation forecast to 3.4 percent instead of 3.5 percent.

The continued build-up in inflation pressures prompted the Monetary Board to raise interest rates by 25 basis points last March 24 after keeping them at record lows for 20 months due to the benign inflation outlook.

This brought the overnight borrowing rate to 4.25 percent from a record low four percent and the overnight lending rate to 6.25 percent from six percent.

“Inflationary pressures have intensified to an extent that the central bank has to act to keep inflation expectations well anchored,” DBS said.

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, helping the Philippines post its strongest growth in 34 years as the gross domestic product (GDP) expanded by 7.3 percent last year.

“Unless inflationary pressures turn out to be surprisingly benign in the second quarter of 2011, annual inflation will be above 5.0 percent in the second half and further rate increases are likely,” it said.

DBS said the BSP is expected to further raise interest rates by 75 basis points at 25 basis points each in the second, third, and fourth quarters bringing the overnight borrowing rate to five percent and the overnight lending rate to 7.0 percent.

“This affirms our view that yesterday’s hike would be the start of a gradual rate hike cycle; we are expecting three more hikes totaling 75 basis points this year,” the investment bank added.

DBS now also sees the country’s GDP expanding 5.5 percent instead of five percent but maintained next year’s GDP growth forecast at 5.2 percent.

“With full-year real GDP growth of 7.3 percent last year and expected to be similarly strong this year, the expansion in aggregate demand is strong, which suggests that the risk of pass-through from commodity prices to broad inflation indexes is high,” DBS said.

Economic managers, through the Cabinet-level Development Budget Coordination Committee (DBCC), are now reviewing this year’s macroeconomic and monetary targets in light of the tensions in the Middle East and North African states, as well as the disasters in Japan.

The DBCC has set a GDP growth target of 7-8 percent this year. –Lawrence Agcaoili (The Philippine Star)