Inflation seen rising to 5.4% this year

MANILA, Philippines - UK-based Credit Suisse sees the country’s inflation kicking up to 5.4 percent this year, breaching the higher end of the three percent to five percent target set by the Bangko Sentral ng Pilipinas (BSP).

Credit Suisse vice president of economics market research unit Devika Mehndiratta said in the Philippine portion of its Emerging Markets Quarterly update that the investment bank’s revised inflation forecast would also exceed the revised 4.4 percent inflation forecast of the BSP this year.

“We recently raised our inflation forecast to 5.4 percent year-on-year, higher than the BSP’s projection of 4.4 percent. Our revised inflation forecast now breaches the upper band of the official inflation target of three percent to five percent,” Mehndiratta stressed.

Inflation kicked up to a nine-month high of 4.3 percent in February, exceeding the BSP forecast of three percent to 4.1 percent for the month due to rising oil and food prices in the world market. Inflation averaged 3.9 percent in the first two months of the year compared to 4.2 percent in the same period last year.

Due to higher inflation turn out, the BSP raised its inflation forecast to 4.4 percent instead of 3.6 percent this year and to 3.5 percent to three percent next year. The forecast is expected to be revised upwards on March 24 by the policy setting body.

Mehndiratta pointed out that inflation in the country has been pretty well-behaved as rice prices have remained flat while transport fare increases have not yet fully followed fuel price increases.

The economist explained that the country’s output gap that closed in the first quarter of last year would now start exerting upward pressure on core inflation that excludes all energy and food prices to about three percent from 1.9 percent.

Assuming that global oil and food prices do not continue to move up higher, Mehndiratta said inflation would not go up to alarming double digit levels just like in 2008.

“We do not see inflation going up to the worryingly high 2008 levels,” the Credit Suisse official stressed.

According to Mehndiratta, food inflation would likely peak at 6.6 percent from 4.3 percent but would not go near the 19 percent peak registered in 2008.

The investment bank now sees the BSP raising its key policy rates by 100 basis points this year instead of 50 basis points this year and 50 basis points next year.

“We now expect 100 basis points of rate hikes in 2011, but expect these to be implemented in tentative 25 basis point steps,” Mehndiratta said.