StanChart sees RP inflation averaging 5.5%

Standard Chartered Bank has projected the country’s inflation rate to average at 5.5 percent in 2008, as it expects the Bangko Sentral ng Pilipinas (BSP) to hold its policy rates steady for the rest of the year.

Concluding a six month-long cycle of policy easing, the BSP decided to leave all its policy settings unchanged last week and most foreign banks said they expected the central bank to hold steady from hereon.

SCB senior regional economist Simon Wong said over the weekend that the BSP would cut again in early 2009 as inflation begins to ease and the US economy slows down further.

He said the prolonged US recession still pointed to lower rates in the medium term. As a result, he said SCB expected the BSP to keep policy rates unchanged for the rest of this year.

“However, our view remains that the US downturn will be drawn out over a period that extends beyond the current supply-driven inflation cycle,” Wong said. “We now see 2008 inflation to average 5.5 percent.”

Provided that wage growth could be restrained at a benign level, Wong said the inflation rate should retreat below five percent in 2009, allowing the central bank to resume easing.

According to Wong, the BSP’s decision last week was also just as expected, with the current upside risk to inflation likely to result to a breach in the government’s 2008 target inflation of three to five percent.

Wong noted that the BSP has characterized its current stance as “neutral” while also making specific reference of acting “decisively” to contain “second-round inflation” impact on wages and fare increases.

“The BSP also stresses that current momentum ‘provides ample room’ for such action, which clearly refers to still strong exports and remittance numbers in January-February,” Wong said.

Wong said latest developments suggested that the external sector was holding up well against recent financial turbulence, with export growth still averaging eight percent year-on-year while overseas remittance went up 15.5 percent in the first two months of the year.

“Granted, we do expect these headlines to weaken in coming months as the US recession deepens,” he said. “Yet the receding risk of an immediate collapse in external demand has taken away the urgency for the BSP to match the US interest cycle.”

Wong said the US Fed is likely to pursue a “more moderate” easing course and cut its rates by 25 basis points each in the April, June and August meetings.

“This should allow the BSP to have more flexibility in the near term to re-position itself as it manages an increasingly precarious growth-inflation balance at home,” he said.

Wong said focus is shifting towards inflation for now but on the other hand, growth concerns have given way to price concerns as the economy now faces increasing risk of a wage-inflation spiral.

“The central bank’s monetary policy statement, by stressing it has the will and capability to hike rates, clearly aims to give wage setters leverage in the coming wage rounds,” Wong pointed out.

He said, shifting towards a neutral stance under current circumstances would also broaden the bank’s policy options should eventual wage concessions prove inflation-hostile.