Inflation seen at 1.3% in third quarter

MANILA, Philippines - The country’s national average inflation rate is projected to drop to as low as 1.3 percent in the third quarter of this year as the prices of commodities continue to ease compared with last year’s rapid escalation.

This developed as the central bank survey of private sector analysts and economists pegged the inflation rate at an average of 4.5 percent, higher than the government’s 3.9-percent projection.

The Bangko Sentral ng Pilipinas (BSP) expects inflation to drop steadily in the first three quarters of the year before going up slightly towards the end of the year.

BSP Deputy Governor Diwa Guinigundo said the steady decline in the inflation rate is expected to bring the average rate down to 3.9 percent, well within the official target inflation of 2.5 to 4.5 percent.

Guinigundo said the BSP’s 2009 and 2010 outlook considered that food and non-food prices have declined dramatically, leading to actual drops in commodity process.

Guinigundo said the BSP also believed that second round effects have run their course and this would lead to inflation averaging at 4.7 percent in 2010, also within the 3.5 to 5.5 percent.

“The base effects for 2009 are also not insignificant,” Guinigundo said. “We’re also looking at the impact of transport fare reductions and the lower path for Dubai oil,” he added.

The BSP said survey indicates that inflation rate would average at 6.8 percent in the first quarter and drop down to 4.1 percent in the second quarter of the year.

The BSP also reported that based on its initial monthly survey among private sector economists and analysts, expected inflation for 2009 declined from 6.5 percent to 4.5 percent as of December 2008, and from 9.2 percent to 6.8 percent for Q1 2009.

The BSP said this was consistent with the results of the fourth quarter 2008 Consumer Expectations Survey (CES) and Business Expectations Survey (BES), showing lower inflation expectations and a smaller proportion of respondents anticipating an increase in inflation.

The BSP said the results of the January 2009 Asia Pacific (AP) Consensus Survey also showed lower inflation expectations, with average inflation for 2009 now forecasted at 4.9 percent from 5.7 percent in the December 2008 survey.

The relatively low inflation rate is projected by the BSP despite the fact that domestic liquidity is expected to grow by 14 percent, higher than originally seen as the central bank continued to ease monetary policy to stimulate growth.

Domestic liquidity (also referred to as M3) is the amount of money circulating in the domestic economy. At a time when the economy is booming and money supply is expanding rapidly, the central bank would normally step in to mop-up in order to ensure that inflation would not surge.

The BSP had projected that M3 should expand no faster than 13 percent this year in order to prevent inflation pressures from building up and triggering a clamor for wage adjustments which would feed yet again into the inflation cycle.

But under current circumstances when the economy is slowing down, the central bank said it wants to release more liquidity into the system to encourage people to spend and stir up economic activity to prevent the economy from stalling.

In the last two months, the BSP has already cut its key policy rates twice by 50 basis points, combined with the reduction in the banks’ liquidity reserves earlier on.