Inflation likely to exceed 4.5% by mid-2011

MANILA, Philippines - London-based Barclays Capital sees inflation exceeding 4.5 percent in the middle of the year prompting the Bangko Sentral ng Pilipinas (BSP) to adjust upwards its key policy rates by 25 basis points in the third quarter of the year.

In a report, Barclays Capital economist Prakriti Sofat said inflation likely averaged 3.4 percent in January but would gradually increase until it exceeds 4.5 percent in the middle of the year.

“We continue to believe that inflation will rise in the coming months, and expect January inflation to print at 3.4 percent year on year. We think inflation will exceed 4.5 percent by the middle of the year and expect the BSP to hike the policy rate by 25 basis points to 4.25 percent in the third quarter,” Sofat stressed.

Despite the uptick, she explained that the investment bank believes that inflation this year would average four percent or well within the BSP target of three percent to five percent.

“For 2011, we expect inflation to average four percent, in the middle of the BSP’s target band of three percent to five percent,” she added.

The BSP sees inflation averaging 3.6 percent this year and three percent next year or well within the target range of three percent to five percent between 2011 and 2014. Inflation inched up to 3.8 percent in 2010 from 3.2 percent in 2009.

The BSP slashed its key policy rates by 200 basis points between November of 2008 and July 2009 to cushion the impact of the global financial crisis on the economy. The BSP kept its key policy rates at record lows of four percent for the overnight borrowing rate and six percent for the overnight lending rate for 13 straight policy meetings.

As a result, the Philippines avoided recession after its domestic output as measured by the gross domestic product (GDP) expanded by 1.1 percent in 2009 from 3.8 percent in 2008.

The country’s gross domestic product (GDP) growth zoomed to its fastest level of 7.3 percent last year after slackening to 1.1 percent in 2009 from 3.8 percent in 2008 due to the full impact of the global economic meltdown. This was faster than the revised target of five percent to six percent set by the Cabinet-level Development Budget Coordination Committee (DBCC).

This year the DBCC sees the country’s GDP growing between seven percent and eight percent.

Sofat said Barclays Capital sees the country’s GDP growth easing to five percent this year.

“We continue to expect GDP to expand by five percent in 2011. We believe the risks are evenly balanced - downside risks from higher food and oil prices, and upside risks from stronger-than-expected electronics exports. The government’s target for 2011 growth is seven percent to eight percent,” she explained.