Barclays Capital revises Phl inflation forecast to 4.8%

MANILA, Philippines - British-owned Barclays Capital has revised upwards its inflation forecast for the Philippines to 4.8 percent instead of four percent this year after average inflation kicked up to a nine-month high in February due to rising global oil and food prices and expects the Bangko Sentral ng Pilipinas (BSP) to raise its key policy rates this month.

Barclays Capital economist Prakriti Sofat said in a report that this marks the second straight month the investment bank hiked its inflation forecast for the Philippines.

The investment bank earlier changed its inflation forecast for the Philippines to four percent instead of 3.6 percent on the back of higher risks from energy prices.

However, Sofat said oil prices moved sharply higher on developments in the Middle East as well as the generally tight demand-supply dynamics.

“Against this backdrop, we are revising up our 2011 inflation forecast to 4.8 percent,” she stressed.

She explained that the company’s inflation forecast was well within the target of 3-5 percent set by the BSP for 2011-2014.

The BSP has raised its inflation forecast to 4.4 percent instead of 3.6 percent this year and to 3.5 percent instead of three percent next year as the balance of risk to inflation continue to tilt towards the upside.

“Our forecast now stands above the BSP’s estimate of 4.4 percent and is just shy of the central bank’s target range of 3-5 percent for 2011,” Sofat said.

Inflation spiked to a nine-month high of 4.3 percent in February from the revised 3.6 percent in January breaching the BSP forecast of 3-4.1 percent. Average inflation stood at 3.9 percent in the

first two months of the year from 4.2 percent in the same period last year.

BSP Governor Amando M. Tetangco Jr. reiterated that the higher inflation in February supports the view of monetary authorities that the scope for keeping interest rates at record lows has narrowed and the BSP is ready to make adjustments to its policy stance as and when necessary.

The next policy setting meeting of the central bank’s Monetary Board is scheduled on March 24.

Sofat said risks of a March hike have increased significantly despite the fact that the best case scenario of Barclay Capital is that interest rates would be adjusted in the middle of the year.

“Our sense is that the central bank may be inclined to front-load rate hikes and the risks of a hike as early as March 24 have increased significantly,” she added.

According to her, the BSP would also be willing to allow the currency to lean into imported price pressures as it expects the peso to appreciate to 42.50 to $1 level within the next three months.

The benign inflation outlook allowed the Monetary Board to keep its key policy rates at record lows for 14 straight policy setting meetings since July 2009. The body’s accommodative policy stance supported a strong gross domestic product (GDP) growth of 7.3 percent last year from 1.1 percent in 2009.

The central bank slashed key interest rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy. This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.