Inflation seen easing to 3.3%

MANILA, Philippines - Global investment bank Union Bank of Switzerland (UBS) sees consumer prices in the Philippines easing to 3.3 percent this year from 4.8 percent last year.

In a report, UBS economist Edward Teather said that inflation this year would fall within the BSP target of three percent to five percent.

“We continue to forecast 3.3 percent average CPI inflation in 2012 against a policy target of three percent to five percent,” Teather stressed.

Inflation eased to 2.6 percent in March from 2.7 percent in February amid soaring oil prices in the world market. The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

“Likewise, faced with unfavorable year on year comparisons, Philippine CPI inflation appears very close to bottoming out,” he added.

He pointed out that the BSP would likely keep interest rates steady at record lows until the end of the year after a 50 basis point reduction early this year.

The BSP slashed interest rates by 25 basis points last Jan. 19 and by another 25 basis points last March 1 due to benign inflation outlook as well as fragile global economic growth.

This brought the overnight borrowing rate back to a record low of four percent and the overnight lending rate at six percent.

However, the BSP kept interest rates unchanged last April 19 to assess the impact of the rate cuts in January and March.

“Knowing this, we do not expect the BSP to lower policy rates any further. However, inflation should stay low enough to prevent policy rate increases this year,” Teather explained.

He pointed out that credit growth in the country would pick up with the start of the recovery of the gross domestic product (GDP).

“The pace of credit growth and inflation should lag the GDP growth cycle. Although growth seems to have recovered in early 2012, momentum was below par through much of 2011. As such the lagged effects of diminished confidence, pricing power and capacity pressures that were behind the recent decline in CPI inflation and the moderation in credit growth are most likely still playing out,” the economist said.

Inflation seen According to him, UBS raised the country’s GDP growth forecast to 4.5 percent instead of 3.3 percent this year.

 “This said, we tend to find that investors are comfortable with the idea that Philippine credit growth is and should continue to be healthy. However, there is some debate as to where the credit is going and when it will show-up in investment,” he added.

 He said the Aquino administration’s public private partnership (PPP) scheme would serve as a catalyst for growth.

The Cabinet-level Development Budget Coordination Committee (DBCC) sees the country’s GDP growing between five percent and six percent this year after slackening to 3.7 percent last year from 4.6 percent in 2010 due to weak global demand and cautious spending by the Aquino government.