Japanese bank sees PHL inflation at 6.1% this year

A Japanese investment bank has projected that a build-up in price pressures will push the Philippine inflation rate to 6.1 percent in 2011, or nearly twice the 2010 rate. In its economic outlook released this month, Nomura International (HK) Ltd. sees a jump from last year’s inflation rate of 3.8 percent, after the Philippines posted its strongest economic growth in three decades, with its gross domestic product (GDP) up to 7.3 percent from 1.1 percent in 2009. The projection exceeds the Bangko Sentral ng Pilipinas (BSP) inflation target of 3-5 percent between 2011 and 2014. Due to rising oil and food prices in the world market, however, the BSP has raised its inflation forecast this year to 4.4 percent instead of 3.6 percent. The central bank has also pegged next year’s inflation target at 3.5 percent, up from the previous projection of 3 percent. In February, the country’s inflation hit a nine-month high of 4.3 percent, from 3.6 percent in the previous month, bringing the average inflation in the first two months of the year to 3.9 percent. In the same period in 2010, the country’s inflation averaged 4.2 percent. Nomura explained, “Given this headline consumer price index trajectory and the pass-through from food to non-food prices, we also expect core inflation to accelerate faster. We think wage pressures are likely to build ahead of the next round of wage negotiations in June or July so the potential for second-round effects of supply-side inflation pressures is large." On the average per quarter, the investment bank projects a breakdown of the country’s inflation rate as follows: 3.8 percent in the first quarter of the year, 5.4 percent in the second, 7.3 percent in the third, and 8 percent in the last stretch of the year. Raising interest rates Nomura added that the build-up in inflation pressures will prompt the Monetary Board to raise its interest rates by 100 basis points this year, starting with a 25-basis-point increase on March 24. “As a result, we think the March hike will likely be followed by three more 25 basis point hikes this year, taking the overnight reverse [repurchase] rate to 5 percent at end-2011," Nomura said. To cushion the impact of the global financial crisis on the local economy, the BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009, bringing the overnight borrowing rate to a record low of 4 percent and the overnight lending rate at 6 percent. For 14 straight policy rate-setting meetings since July 2009, the BSP managed to keep interest rates at record lows. GDP growth to slow down Nomura also said the Philippines’ economic growth will slow down to 5.4 percent this year before recovering to 5.7 percent next year because of the steady increase in commodity prices. "A further surge in commodity prices, in particular of oil and rice, is a key downside risk to growth. Slower-than-expected progress on the reform agenda could hurt confidence," the investment bank explained. The country’s GDP will expand to a range between 7 percent and 8 percent this year, the Cabinet-level Development Budget Coordination Committee has reported. — PE/JE, GMA News