MANILA, Philippines - Economists believe that the tightening cycle of the Bangko Sentral ng Pilipinas (BSP) could stretch up to next year due to the continued build up of inflation pressures on the back of escalating global and food prices.
British banking giant Hongkong and Shanghai Banking Corp. economist Sherman Chan said in its latest research note that inflation could average 5.4 percent, breaching this year’s BSP target but remaining under the upper bound of next year’s target.
The BSP has set an inflation target of three percent to five percent between 2011 and 2014.
“This means that the tightening cycle may need to be stretched well into next year in order to ensure price stability.
The BSP raised its interest rates by 25 basis points last March 24 as the continued rise in global oil and food prices placed the central bank’s inflation target this year at risk.
The hike brought the overnight borrowing rate to 4.25 percent from the record low four percent and the overnight lending rate at 6.25 percent from six percent.
Monetary authorities managed to keep interest rates at record lows for 14 straight policy rate setting meetings dating back to July 2009 due to the benign inflation outlook.
The BSP slashed 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.
Chan pointed out that the monetary authorites appear to have become increasingly watchful of how inflation pressures are putting their official target at risk.
“Amid surging global commodity prices and strong domestic demand, we see significant upside risks to the central bank’s inflation forecast for both this year and next,” Chan said.
He said the country’s inflation could surpass the upper bound of the BSP target of three percent to five percent in the second quarter of the year due to the rapid rise in global food and fuel prices as well as the strong domestic demand.
According to him, this would translate to a 100 basis point increase in key policy rates this year bringing the overnight borrowing rate to five percent and overnight lending rate to seven percent.
“As such, we forecast another two rounds of 25 basis point hikes in the second quarter followed by one more in third quarter, which should help to keep inflation at an average of 5.4 percent this year, still a little above the target band,” Chan added.
On the other hand, Barclay Capital economist Prakriti Sofat said the BSP would raise its key policy rates by another 50 basis points in May and July as it is concerned about by the possible second-round effects due to clamor for higher wages.
Sofat said the BSP is leaning towards taking the developments in MENA states and Japan more as an inflation risk rather than growth.
Last Thursday, the BSP’s Monetary Board raised its inflation forecast to above 4.4 percent but within five percent this year but lowered next year’s forecast to 3.4 percent from 3.5 percent.
“We continue to expect inflation to average 4.8 percent in 2011, just shy of the top-end of the three percent to five percent target band,” Sofat said.
She added that the political situation in the MENA region would remain fluid and uncertainties would likely linger for some time posing upside risk to oil prices.
The BSP has already raised its oil price assumption to $100 to $110 per barrel instead of $90 to $100 per barrel due to the tensions in the Middle East.