IMF hikes Phl inflation forecast to 4.9%

MANILA, Philippines – The International Monetary Fund (IMF) raised its inflation forecast for the Philippines to 4.9 percent instead of 3.9 percent this year amid the escalating global oil and food prices but retained the country’s economic growth forecast.

In its April 2011 World Economic Outlook (WEO), IMF now sees inflation kicking up to 4.9 percent this year before easing to 4.3 percent next year after averaging 3.8 percent last year.

The latest inflation outlook of the IMF was within the higher end of the inflation target of three percent to five percent of the Bangko Sentral ng Pilipinas (BSP) for 2011.

The IMF sees inflation among the Association of Southeast Asian Nation (ASEAN-5) including the Philippines increasing to 6.1 percent this year before slowing down to 4.7 percent next year from 4.4 percent last year. Inflation would be highest in Vietnam at 13.5 percent followed by Indonesia with 7.1 percent, Philippines with 4.9 percent, Thailand with four percent, and lowest in Malaysia at 2.8 percent.

For Asia, the IMF expects inflation to average 4.7 percent this year from 4.3 percent last year before easing further to 3.4 percent next year.

“With continued rapid growth, output now close to potential levels, and monetary conditions remaining accommodative, inflation is expected to continue increasing this year across much of developing Asia,” the IMF added.

The BSP raised interest rates by 25 basis points last March 24 as a preemptive move to keep inflation expectations well anchored amid the escalating global oil and food prices. 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.

The BSP raised its inflation forecast to the higher end of the three percent to five percent target instead of the previous projection of 4.4 percent for this year but lowered next year’s forecast to 3.4 percent from 3.5 percent.

Had the BSP kept the rates unchanged, the inflation forecast of monetary authorities would have gone up to 5.18 percent exceeding the BSP’s inflation target for the year.

Prior to the continued build up in inflation pressures, monetary authorities were able to keep interest rates at record lows for 20 straight months dating back to July 2009 due to the benign inflation outlook. The BSP slashed key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy.

This enabled the Philippines to post its strongest economic growth in 34 years after its gross domestic product (GDP) expanded by 7.3 percent under a low inflation environment of 3.8 percent last year.

The IMF said monetary policy remains generally accommodative in Asia even as many economies have taken steps toward normalization.

“The further tightening currently expected by markets in some economies is not enough to prevent inflation from increasing. In addition to more rapid tightening of policy rates, greater exchange rate flexibility will be an important component of policy tightening,” the lender warned.

However, the IMF kept the GDP growth target of the Philippines to five percent this year and next year. It expects the GDP growth of Asean-5 to ease to 5.4 percent this year before rebounding to 5.7 percent next year from 6.9 percent last year.

Vietnam is expected to post the fastest growth this year with 6.3 percent followed by Indonesia with 6.2 percent, Malaysia with 5.5 percent, Philippines with five percent, and Thailand with 4.5 percent.

“The ASEAN-5 economies are projected to expand by 5.5 percent in 2011 and 5.75 percent in 2012. The ASEAN-5 will be led by Indonesia, where strong consumption and a recovery in investment will raise growth to 6.25 percent this year and 6.5 percent in 2012,” it said.

The IMF’s GDP growth target for the Philippines was well below the GDP growth target of seven percent to eight percent set by the Cabinet-level Development Budget Coordination Committee (DBCC). –Lawrence Agcaoili (The Philippine Star)