Wednesday, 4 February 2009

Philippine inflation forecast at 4.4% by April

Erik de la Cruz
The Manila Standard

DISINFLATION trend in the Philippines will continue with the headline figure likely to have decelerated to 6.9 percent in January and hit as low as 4.4 percent by April, giving the Bangko Sentral ng Pilipinas (BSP) room to continue cutting interest rates in March.

Analysts and economists at First Metro Investment Corp. (FMIL), the investment-banking arm of the Metrobank Group, and University of Asia & the Pacific (UA&P) gave these forecasts in their joint monthly commentary.

They expect the domestic economy to continue expanding but at a slower rate of 3.0 percent to 3.3 percent in the first quarter, after growing by an unexpectedly decent 4.5 percent in the last quarter of 2008.

“Remaining relatively less scarred by the world financial and economic crisis in 2008 is somehow a confidence booster. However, we probably have not seen the worst,” they said in the January issue of FMIC’s The Market Call.

The US economy, they said, may hit the bottom in the first quarter of 2009, but it is not expected to return to positive-growth territory until the fourth quarter of the year. Four quarters of decline will be the longest—and probably the deepest—recession in decades for the US, a key market for Philippine labor and exports.

Disinflation, or the slowing of the rate at which prices increase, will allow the BSP to cut key interest rates by a further 25 basis points at its next policy-setting meeting scheduled for March 5, they said.

They expect inflation to decelerate to 6.8 percent in February, 6.3 percent in March and 4.4 percent in April, as crude-oil prices stabilize at $40 to $50 per barrel from last year’s all-time peak of over $140 per barrel.

The headline inflation figure in December was a slower-than-expected 8 percent against 9.8 percent in November, with oil prices sliding further while food prices staying stable. The January inflation data will be released by the government on Thursday.

“Demand for crude oil is now expected to decline not only because of the recession in the US, Europe and Japan, but also because of the sharp slowdown now believed to impact China, India and other emerging economies,” the FMIC-UA&P team said.

The BSP last week slashed its overnight interest rates by half a percentage point after a rate cut of the same magnitude in December, to 5.00 percent for borrowing and 7.00 percent for lending. With inflation pressures expected to continue easing in the coming months, the BSP has signaled the possibility of more rate cuts.

Other economists are looking at rate cuts of more than 100 basis points this year.

Despite bleak prospects for the global economy this year, the FMIC-UA&P team maintains an upbeat outlook for the local bond market.

The national government (NG) will likely incur a wider budget deficit of P180 billion this year, more than four times the original ceiling of P40 billion, as it plans to increase spending on infrastructure and social services to stimulate the economy, the team said. This, it said, implies more government borrowings from the domestic market.

“The net domestic borrowing for the year could reach P172.5 billion, or around 2.1 percent of GDP. Thus, more NG debt papers are to be auctioned, and since we expect inflation to go below 5 percent by April 2009, the BSP will likely continue to lower its policy rates,” the team said.

“This makes us optimistic on the success of these future auctions.”

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