Nomura says Phl inflation may hit 5.8%

MANILA, Philippines - Nomura Securities Co. of Japan warned that inflation in the Philippines could kick up to as high as 5.8 percent this year.

In a study, Nomura economist Euben Paracuelles said that the Philippines is one of the most vulnerable countries in the region to higher oil prices as it is importing nearly all of its oil requirements.

“Without any fuel subsidies, there is high pass-through from imported inflation into headline domestic inflation,” Paracuelles stressed.

He pointed out that inflation could rise sharply to 5.8 percent in the “ugly” scenario, 4.9 percent in the “bad” scenario, and four percent in the “good” scenario. The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

Under its “ugly” scenario, Nomura sees the price of Brent averaging $135 per barrel this year. Oil price is seen averaging $115 per barrel in the first quarter but supply-side concerns or financial speculation intensify causing the oil price to spike to an average of $150 per barrel in the second before falling to $140 in the third and finally to $125 in the fourth quarter as demand destruction starts to kick in.

Nomura sees oil price averaging $125 per barrel in each of the four quarters under the “bad” scenario and $115 per barrel under its base case or “good” scenario wherein it would average $120 per barrel in the first before falling to $115 in the second, $105 in the third, and $100 in the fourth.

The rise in the price of Brent crude took a breather last week, stabilizing at about $124 per barrel but up nearly 15 percent from $108 per barrel at the end of last year. This pales in comparison to the 364 percent surge over the prior five years to the peak of $144 per barrel in July 2008.

As such, Paracuelles said the BSP could raise interest rates by as much as 75 basis points, bringing the overnight borrowing rate to 4.75 percent and the overnight lending rate to 6.75 percent this year in the “ugly” scenario.

“But in the ugly scenario, we expect a total of 75 basis point hikes to 4.75 percent given how sensitive core inflation becomes to increases in the headline number once it breaches the BSP’s target,” he added.

The BSP slashed interest rates by another 25 basis points last March 1 bringing the overnight borrowing rate back of record low level of four percent and the overnight lending rate at six percent due to benign inflation outlook amid soaring oil prices.