HSBC scales down 2011 inflation forecast to 5%

London-based financial giant Hongkong Shanghai and Banking Corporation (HSBC) has lowered its 2011 inflation forecast for the Philippines to 5 percent.

"Headline inflation is still likely to surpass the central bank’s target band in the coming months, but with the upward trajectory less steep than initially expected, we have now cut our forecast… bringing it right to the top of the Bangko Sentral ng Pilipinas' (BSP) target range," HSBC economist Sherman Chan said Wednesday.

May inflation rising at a slower-than-expected pace of 4.5 percent prompted the revised forecast, according to Chan.

Chan said prices are expected to eventually peak in October with “further acceleration in inflation over the coming months, partly because core inflation is also quickening. However, runaway demand-driven inflation is unlikely, as remittance growth has cooled, which will eventually weigh on consumption."

The HSBC economist said last month’s slower rise in prices may give policymakers at the Bangko Sentral ng Pilipinas (BSP) a good reason to keep policy interest rates at current levels. But other economists expect otherwise. http://www.gmanews.tv/story/222691/business/bsp-to-raise-policy-rates-anew-say-economists

The Monetary Board raised interest rates by a fourth of 1 percent on March 24 and again on May 5 bringing the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

"With the latest inflation reading still sitting firmly within the target band, the BSP is given a chance to take a breather at the June meeting, after two successive rate hikes. This will also allow the central bank some time to assess the country’s growth outlook, especially amid external uncertainties," Chan said.

But the flexibility may be short-lived, according to the economist because the BSP will likely raise interest rates by 25 basis points when the Monetary Board meets next July 28.

To keep inflation pressures in check, Chan sees the BSP adding 50 basis points to its rates in the third quarter and another 25 basis points in the last quarter, bringing the overnight borrowing rate to 5.25 percent and the overnight lending rate to 7.25 percent by year-end.

BSP data show a seasonal upswing in overseas remittances in the last few months of the year, fanning inflation. — ELR/VS, GMA News