Manila, Philippines - Singapore-based DBS Bank Ltd. has lowered its inflation forecast for the Philippines this year and next due to lower-than-expected consumer prices in the first four months of the year as well as the softening oil prices in the world market.
In a research report, DBS said it has slashed its inflation forecast to 3.5 percent instead of four percent this year and 4.3 percent instead of 4.8 percent next year.
“On the back of softening oil prices and lower-than-expected headline numbers in the first four months of the year, our inflation forecast has been lowered to 3.5 percent and4.3 percent for 2012 and 2013, respectively,” DBS noted.
Latest data from the National Statistics Office (NSO) showed that inflation kicked up to three percent in April from 2.6 percent in March, bringing the average inflation to three percent in the first four months of the year.
DBS said the utilities component of inflation led the increase with 3.1 percent, with the transport component surging 2.2 percent since the beginning of the year.”
However, despite the rising oil prices, favorable base effects and contained food prices have ensured that inflation stayed low. Going forward, with oil prices starting to ease, this driver of inflation is also going to fade,” the investment bank said.
It added that stable food prices have been the main reason why average headline inflation eased in the first four months of the year as rice output for the first quarter was little changed compared to the record level of four million tons in the same quarter last year.
“Moreover, output for the first half is expected to rise by 2.7 percent. As such, there are limited threats of spiking food prices in the immediate future,” DBS explained.
The investment bank reported that Brent crude oil prices have tumbled to $112 per barrel from $126 per barrel in mid-March.
“With oil prices having fallen by more than 10 percent, oil companies have also started to cut prices accordingly,” it said.
Likewise, the minimum jeepney fare has also been reduced to P8 from P8.50.
DBS is confident that inflation would fall within the target of three percent to five percent set by the Bangko Sentral ng Pilipinas (BSP) for this year and next year despite the sovereign debt crisis in Europe and economic uncertainties in the US.
“Events in the US and euro zone look likely to continue weighing on energy prices and we expect inflation to stay well within the central bank’s target of three percent to five percent,” it said.
According to the investment bank, the BSP would likely keep interest rates steady until the end of the year.
The central bank’s Monetary Board has slashed interest rates by 50 basis points so far this year, bringing the overnight borrowing rate back to a record low of four percent and the overnight lending rate at six percent.
The BSP lowered interest rates by 25 basis points last January 19 and by another 25 basis points last March 1 due to benign inflation outlook and the fragile global economic growth.
The rates were left unchanged during the policy ratesetting meeting by the Monetary Board last April 19.
“The BSP has already cut the overnight borrowing rate by 50 basis points this year and further cuts do not appear likely. We expect the policy rate to be kept on hold at four percent for the rest of the year,” DBS added. - By Lawrence Agcaoili