Inflation seen to peak at 5% in June

MANILA, Philippines - American banking giant Citigroup and Netherlands-based ING see average inflation peaking at five percent in June or by the third quarter of the year.

Citi economist Jun Trinidad said the consumer price index would test the range of five percent either in June or July but would average 4.8 percent this year from 3.2 percent last year.

“CPI is likely to probe the range of five percent either in June or July, based on the base case estimates of our time series analysis, which may finally compel policymakers to kick start the policy rate adjustment,” Trinidad stressed. 

Latest data released by the National Statistics Office (NSO) showed that inflation climbed to a three-month high of 4.4 percent in March from 4.2 percent in February – bringing the average inflation in the first quarter of the year to 4.2 percent from 6.9 percent in the same quarter last year.

“Meanwhile, higher first quarter consumer price index probably inflated the tax base, contributing to better tax collections during the period. We estimate that inflation’s contribution to first quarter tax gains was probably in the range of 40 percent to 45 percent,” he added.

The economist explained that “the prevailing cost-push and demand conditions suggest a slower pace of rate adjustment likely to begin after the May elections.”

It would be recalled that monetary authorities slashed its key policy rates between December of 2008 and July of 2009 as part of its accommodative stance to boost the slackening domestic economy and cushion the impact of the global financial crisis. This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.

Last March 11, the central bank’s Monetary Board (MB) decided to keep its key policy rates unchanged but continued to phase out some of its liquidity enhancing measures introduced as early as November of 2008 aimed at cushioning the impact of the global economic meltdown.

After keeping its key rates unchanged for six straight policy-setting meetings, the BSP continued unwinding its accommodative stance by phasing out more liquidity enhancing measures due to clearer signs of increasing momentum in economic recovery.

Monetary authorities reduced the peso rediscounting budget to P40 billion from P60 billion, restored the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and restored the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.

Last January 28, the BSP raised the rate on a short-term lending facility to four percent from 3.5 percent marking the start of an exit strategy with the tweaking of exiting liquidity enhancing measures.

For his part, ING economist Tim Condon said inflation would likely hit five percent in the third quarter of the year before easing back to the four percent level before the end of the year.

“We forecast headline inflation accelerating to five percent in the third quarter of 2010 from the commodity price bounce of 2009, then receding toward four percent by year end,” Trinidad stressed.

He added that inflation would not be an issue for the BSP this year.

“We do not think inflation will be a factor for the BSP or fixed rate treasury notes (FXTN) yields this year,” he said.

The BSP’s inflation target for 2010 is between 3.5 percent and 5.5 percent but expects inflation to come in at 4.64 percent from 3.2 percent last year. Next year, the central bank sees inflation coming in at 3.45 percent or within the target range of 3 percent to 5 percent.