Japan's Nomura sees inflation at 6.1% in 2011

MANILA, Philippines - Japanese-owned Nomura International (HK) Ltd. sees the country’s average inflation rising up to 6.1 percent this year from 3.8 percent in 2009 due to the continued build up in inflation pressures.

In a report, Nomura Southeast Asia analysts Yougesh Khatri and Euben Paracuelles said Philippine inflation would continue to accelerate more sharply after a strong economic growth of 7.3 percent in 2009.

The BSP has set an inflation target of three percent to five percent between 2011 and 2014 but 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 due to rising global oil and food prices.

“Core inflation has also started to rise after being relatively stable over the last few months. We forecast headline inflation to average 6.1 percent in 2011, implying an even sharper acceleration for the rest of the year. This also exceeds the BSP’s inflation target of three percent to five percent,” Nomura said.

Inflation kicked up to a nine-month high of 4.3 percent in February from 3.6 percent in January, bringing the average inflation in the first two months of the year to 3.9 percent from 4.2 percent in the same period last year.

“Given this headline consumer price index trajectory and the pass-through from food to non-food prices, we also expect core inflation to accelerate faster. We think wage pressures are likely to build ahead of the next round of wage negotiations in June or July so the potential for second-round effects of supply-side inflation pressures is large,” Nomura added.

The investment bank sees inflation averaging 3.8 percent in the first quarter of the year that would gradually increase to 5.4 percent in the second, 7.3 percent in the third, and finally to eight percent in the fourth quarter.

With the continued build up in inflation pressures, Nomura said the BSP would raise its interest rates by 100 basis points this year, starting with a 25 basis point increase on March 24 and three more increases with 25 basis points each.

“We expect BSP to hike its policy rate by 25 basis points this month. As a result, we think the March hike will likely be followed by three more 25 basis point hikes this year, taking the overnight reverse repo rate to five percent at end-2011,” it added.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy, bringing the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.

The central bank managed to keep interest rates at record lows for 14 straight policy rate setting meetings since July 2009 due to the benign inflation outlook but no less than BSP Governor Amando M. Tetangco Jr. said the scope for keeping interest rates has narrowed.

Nomura said the country’s GDP growth would slow down to 5.4 percent this year before improving to 5.7 percent next year due to the steady rise in commodity prices.

“A further surge in commodity prices, in particular of oil and rice, is a key downside risk to growth. Slower-than-expected progress on the reform agenda could hurt confidence,” it added.