MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) lowered its inflation forecast for the Philipines to five percent from 5.4 percent this year.
In a note, HSBC economist Sherman Chan said that inflation in the coming months would likely breach the higher end of the BSP’s inflation target of three percent to five percent this year.
“Headline inflation is still likely to surpass the central bank’s target band in coming months, but with the upward trajectory less steep than initially expected, we have now cut our forecast for the 2011 average to five percent from 5.4 percent, bringing it right to the top of the BSP’s target range,” Chan explained.
She added that core inflation continued to pick up in the past few months and inflation is expected to peak in October.
“We expect further acceleration in inflation over the coming months, partly because core inflation is also quickening. However, runaway demand-driven inflation is unlikely, as remittance growth has cooled, which will eventually weigh on consumption,” she stressed.
Inflation kicked up to a 13-month high of 4.5 percent in May from the revised 4.3 percent in April as core inflation — which excludes the volatile food and fuel items — rose to 3.7 percent from the revised 3.3 percent. This brought the average inflation in the first five months of the year to 4.2 percent from a year ago level of 4.3 percent.
Chan said HSBC lowered its inflation forecast to 4.6 percent from 5.2 percent in the second quarter, to 5.6 percent from 6.2 percent in the third; and to 5.7 percent from 5.9 percent in the fourth quarter due to the lower-than-expected inflation last month.
“The inflation picture in the Philippines has been less worrying than expected,” the economist added.
According to her, the lower-than-expected inflation for May would give the BSP room to keep interest rates steady during their policy rate setting meeting on June 16.
“With the latest inflation reading still sitting firmly within the target band, the BSP is given a chance to take a breather at the June meeting, after two successive rate hikes. This will also allow the central bank some time to assess the country’s growth outlook, especially amid external uncertainties,” Chan said.
The BSP has so far raised interest rates by 50 basis points as a preemptive move to keep inflation expectations well anchored amid the escalating oil prices in the world market. Without the rate increases, the BSP said inflation forecast would reach 5.6 percent this year and 4.2 percent next year.
The BSP raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 bringing the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.