Steady inflation gives BSP monetary leeway

Inflation in the Philippines this year would not surpass 5 percent, Frankfurt-based Deutsche Bank AG said, noting that the forecast would allow the central bank to keep its policy rates at record lows amid the country's fast economic growth in the first semester. In a global markets research titled "Philippines Trip Notes: A Global Opportunity," Deutsche Bank chief economist Taimur Baig said it is because this year is one of the most benign years in terms of inflation pressures for the country. "It had seemed that food and fuel prices would even firm up in the second half of the year. [The low inflation] would motivate the central bank to exit from ultra-low interest rates," Baig said. On Aug. 26, the Bangko Sentral ng Pilipinas (BSP) maintained the overnight borrowing rate at a record low 4 percent and the overnight lending rate at 6 percent. BSP Gov. Amando Tetangco Jr. earlier said it was possible for monetary authorities to keep its key policy rates unchanged at record lows for the rest of the year "provided that there are no major events that can lead to a significant change in the inflation outlook." Baig said low commodity prices, healthy food-supply situation, and stable peso supported by strong remittances from overseas Filipino workers would help keep inflation expectations under check. "Looking ahead, inflation would likely pick up steadily as some tariff adjustments [in taxi fares, highway toll rates, and electricity charges] would happen. It would also pick up when demand strengthens further. But even in an aggressive forecasts, it is hard to see inflation going past 5 percent this year," he said. Baig said inflation would likely stay within the 2011 target of 3 percent to 5 percent as long as commodity and food prices remain stable. The BSP set an inflation target of 3.5 percent to 5.5 percent this year and 3 percent to 5 percent between 2011 and 2014. Latest data from the National Statistics Office showed that inflation was steady at 3.9 percent in July, bringing the average inflation rate to 4.2 percent in the first seven months of the year. Apart from dealing with inflation, Deutsche Bank said the BSP should also deal with the risk of capital loss due to the low return on the central bank’s US dollar assets as the country’s international reserves keep rising and a possible surge in capital flows that could complicate exchange rate and liquidity management. "The government is keen to channel the prevailing substantial liquidity in the system toward productive investments. But if inflows pick up sharply, the risk of excess liquidity feeding into asset prices is considerable," Deutsche Bank said. —JE, GMANews.TV