UBS hikes inflation forecast

MANILA, Philippines - Investment bank Union Bank of Switzerland (UBS) has raised its inflation forecasts this year due to a sharp rise in food and fuel prices as well as the impact of the El Niño phenomenon.

In its Southeast Asian forecast entitled “Philippines: Looking for (credit) growth,” UBS economist Edward Teather said inflation would likely average at 4.9 percent instead of 3.9 percent this year.

“We revise higher our CPI forecast to 4.9 percent for the year as a whole in 2010 (from 3.9 percent) primarily due to past food and fuel price increases – in line with a similar forecast change by the central bank,” Teather stressed.

He pointed out that future food price spikes could provide a meaningful upside risk to the revised inflation forecast as food accounts for about 50 percent of the consumer price index.

He added that food price increases could provide downside risk for economic growth.

“A more significant El Niño would impact the Philippines economy through weaker agricultural output and higher inflation, which in turn impacts household real income and consumption.

The Bangko Sentral ng Pilipinas (BSP) raised its inflation forecast to 4.7 percent instead of four percent this year due to higher food, commodity, and utility prices.

The revised inflation forecast for 2010 was still within the inflation target of between 3.5 percent and 5.5 percent this year.

The National Statistics Office (NSO) reported that inflation eased to 3.2 percent in 2009 from 9.3 percent in 2008 amid the stimulus program adopted by fiscal and monetary authorities.

“A bout of commodity driven inflation poses the key risk to our view on growth, inflation and the only modest monetary tightening we forecast for the BSP,” the economist said.

According to him, the investment bank sees the country’s gross domestic product (GDP) expanding by five percent this year from 0.9 percent last year.

“Our five percent real GDP forecast for 2010 is based on a bounce in Philippine economic activity in the first half, driven by election spending plus the lagged effects of still loose fiscal and monetary policy settings,” Teather added.

He explained that the BSP would most likely tighten by raising its key policy rates by 50 basis points on the grounds of the uncertain medium term growth outlook and no commodity-driven spike in prices.