ING: 2011 inflation seen rising to 4.2%

By Lawrence Agcaoili, The Philippine Star

Posted at Jan 23 2011 08:03 AM | Updated as of Jan 23 2011 04:03 PM

MANILA, Philippines – Dutch financial giant ING Bank NV said the inflation rate in the Philippines would kick up this year and next on the back of higher transport fares, road toll, oil prices as well as power rates.

ING senior economist Joey Cuyegkeng, in a market report entitled “Manila View and Cues,” said that the consumer price index would likely increase to 4.2% this year and 4.6% in 2012 from about 3.8% last year.

This inflation forecast is still well within the inflation target of three to 5% set by the Bangko Sentral ng Pilipinas (BSP) between 2011 and 2014. The BSP expects inflation to average 3.6% this year and 3% next year.

“We have kept our 2011 inflation forecast at around 4.2%, which reflects a firmer price environment this year than BSP’s average inflation forecast of 3.6% this year. We expect an average inflation rate of 4.6% in 2012 although BSP forecasts an average inflation of 3%,” he stressed.

He added that the upward revision in the bank’s inflation forecasts incorporate the higher tollway fees and some amount of fuel price increases.

“The risk is for oil prices to shoot above assumptions,” he said.

According to him, ING Bank assumed a higher crude oil average price of $95 per barrel compared to the range of between $75 and $95 per barrel used by monetary authorities.

Inflation inched up to 3.8% last year from 3.2% in 2009 but was well within the BSP target of 3.5% to 5.5% for 2010.

Cuyegkeng pointed out that the benign inflation outlook would give monetary authorities enough flexibility to keep key policy rates steady at record lows, at least until the third quarter of next year.

“Despite this forecast difference, we continue to expect steady policy rates for most of this year. The likelihood of a policy rate hike in the fourth quarter increases based on our inflation forecast for 2012,” the economist added.

The BSP’s Monetary Board slashed key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global economic meltdown on the domestic economy. This brought the overnight borrowing rate to a record low 4% and the overnight lending rate at 6%.

The board was able to keep the interest rates steady at record lows for 13 consecutive policy setting meetings.

Cuyegkeng said a moderate growth in domestic liquidity or M3 would lessen price pressures.

“We expect moderate M3 growth to reduce demand pull inflation pressures to surface in 2012,” he added.

Latest data from the BSP showed that the country’s domestic liquidity or M3 stood at P4.14 trillion as of end-November last year or 7.5% higher than the P3.856 trillion recorded a year earlier. The growth in the country’s domestic liquidity slowed down after posting a double-digit expansion of 10.5% in September to 7.7% in October.

The BSP attributed the continued expansion of domestic liquidity although at a slower pace to the growth of net foreign assets (NFA) of both the BSP as well as banks to 14.9% in November from 10.2% in October.

Data showed that the total NFA reached P2.831 trillion as of end-November last year from P2.463 trillion. The NFA of the BSP surged 29.1% to P2.65 trillion from P2.05 trillion while that of banks plunged 56% to P179.99 billion from P409.19 billion.

The BSP traced the decline in the NFA of banks to the upsurge in their foreign liabilities as well as the decrease in their foreign assets.

On the other hand, statistics showed that the growth of net domestic assets (NDA) likewise slowed down to 1.2% in November from 1.8% in October. The NDA reached P2.426 trillion as of end-November last year from P2.454 trillion in end-November 2009.

The central bank reported that credits extended to the private sector posted a double-digit growth of 10% to P2.847 trillion from P2.587 trillion in line with the continued uptrend in bank lending activities and consistent with the strong pick-up in domestic demand.

The increase in credits to the public sector, the data showed, moderated to 3.9% to P1.334 trillion from P1.284 trillion as the expansion of credits extended to the National Government moderated.

M3 is the amount of money circulating in the domestic economy. At a time when the economy is booming and money supply is expanding rapidly, the central bank would normally step in to mop up in order to ensure that inflation would not surge.

Liquidity growth is one of the important vehicles considered in determining the central bank’s monetary policy.