Inflation seen easing further next year

MANILA, Philippines - London-based Barclays Capital said it sees the country’s average inflation easing further next year as fuel-related costs would continue to dampen rising international food commodity prices.

Barclays Capital economist Prakriti Sofat said in a research note that Philippine inflation would range between 3-3.5 percent next year instead of the previous forecast of 3.7 percent which is also the pro- jected average inflation this year.

“With the output gap only flipping into positive in the first quarter of 2011, core price pressures are expected to remain relatively contained. Overall we expect inflation to average 3-3.5 percent in 2011, which is towards the lower end of the central bank’s target range of 3-5 percent,” Sofat stressed.

According to her, food prices are expected to rise next year given the increase in international food commodity prices but added that fuel-related costs would continue to serve as a dampening factor.

She pointed out that the country’s average inflation would slow down further towards the end of the year after easing to an 11-month low of 2.8 percent in October from 3.5 percent in September.

“We expect year-on-year inflation to continue to ease into yearend, largely on account of further deceleration in food and utility costs. Our 2010 average inflation forecast stands at 3.7 percent, which is towards the lower end of the BSP’s 3.5 percent to 5.5 percent target range,” she added.

Inflation averaged four percent in the first 10 months of the year from 4.1 percent in the same period last year. The Bangko Sentral ng Pilipinas has set an inflation target of 3.5 percent to 5.5 percent this year and three percent to five percent between 2011 and 2014.

However, the central bank’s Monetary Board last Oct. 7 slashed its inflation forecast to 3.5 percent instead of four percent this year and to three percent next year due to the lower-than expected inflation in September and the higher-than-anticipated gross domestic product (GDP) growth of 7.9 percent in the first half.

Benign inflation outlook and the stronger-than-expected GDP growth in the first half of the year have allowed monetary authorities to keep its key policy rates at record lows.

It would be recalled that the MB decided to slash its key policy rates by 200 basis points between November of 2008 to July of 2009 to cushion the impact of the global financial crisis on the domestic economy. This brough the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.

Sofat pointed out that the BSP would keep its key policy rates unchanged this year before tweaking the rates in the second half of next year.

“Given the relatively benign inflation backdrop, together with BSP’s concerns that rising interest rate differentials could complicate monetary policy, we maintain that the central bank will keep rates unchanged until yearend. We believe that any rate normalization will probably materialze in the second half of 2011, with inflation and external developments being the key factors to watch,” she said.

She added that the main risks that would threaten its inflation forecast would come from a commodity price shock, especially food and oil.