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Rate hike prospects up as inflation tops forecast




Posted on March 05, 2011


ANNUAL INFLATION accelerated to 4.3% in February -- its fastest pace since May last year -- amid rising food and oil prices, the government reported on Friday.

The February result, which exceeded the 3-4.1% forecast by the central bank, brought the year-to-date average to 3.95% and raised expectations the Monetary Board would finally start raising interest rates when it meets on March 24.

Bangko Sentral ng Pilipinas (BSP) officials said they were considering adjusting the 2011 forecast anew and again signalled a readiness to tighten policy. Overnight borrowing and lending rates have been kept at 4% and 6%, respectively, since July 2009 by the BSP’s policymaking Monetary Board.

The February inflation figure, central bank Governor Amando M. Tetangco. Jr. said in a text message to reporters, will be incorporated "in our forecast runs to see how much it moves the inflation path by, and determine if the new expected path would lead to average inflation forecasts that would risk breaching the target for the policy horizon."

He reiterated statements made earlier this week, saying "our view [is] that the scope for keeping rates steady has narrowed".

Mr. Tetangco stressed, however, that: "It is important to remember that the BSP looks at the expected price movements over a longer policy horizon, and not simply on contemporaneous inflation."

The current inflation forecast of 4.4% -- adjusted last month after inflation picked up to 3.5% in January -- is "to be reviewed," he said.

"Definitely," BSP Deputy Governor Diwa C. Guinigundo said in a separate text message.

The BSP wants to keep inflation within a 3-5% range this year.

The National Statistics Office (NSO) said core inflation, which excludes volatile price movements of products such as food and energy, sped up to 3.5% in February from 3.3% in January.

It pointed to runaway global oil prices, costlier food items and a recent round of transport fare hikes as behind the increase.

Food, beverage and tobacco prices climbed at a faster 4.2% from 3.0% in January, while service costs, which groups gasoline and transport fares, grew by 4.9% from 3.8% a month earlier.

The rise in utility costs, covering fuel, light and water, on the other hand, slowed to 9.9% last month from 11.8% in January.

"[The jump in the service index] was triggered by the general upward price adjustments in gasoline and diesel nationwide along with the increased land transport fares in most of the regions including Metro Manila," the NSO said.

Cid L. Terosa, senior economist at the University of Asia and the Pacific, said rising fuel costs were a major driver, estimating that a 10% rise in oil prices "adds about 0.74% to the average inflation."

Mr. Terosa added that the increase in the prices of bread, flour, noodles, canned goods, cooking oil, and sugar "exerted tremendous upward pressures on price as well."

Commenting on the inflation result, ATR-Kim Eng Securities, Inc. economist Luz L. Lorenzo said, "I think that key policy rates would be adjusted at the next Monetary Board meeting by at least 25 basis points due to higher inflation."

Gilbert M. Llanto, senior fellow at the Philippine Institute and Development Studies, said, "The higher inflation only signals to the monetary authorities the need to keep close watch in order to calibrate an efficient policy stance."

HSBC economist Sherman W. K. Chan, meanwhile, said: "A rate hike looks increasingly likely for this month, with more to follow in the second quarter. The BSP is the only central bank in Asia that hasn’t hiked yet and will now see greater urgency to get ahead of the curve".

Barclays Capital agreed, saying in its Emerging Markets Research: "Our sense is that the central bank may be inclined to front-load rate hikes and the risks of a hike as early as 24 March has increased significantly".

Barclays Capital also said it was revising its 2011 inflation forecast to 4.8% from 4%, noting higher oil prices and upward pressure on food items excluding rice. -- Judy Dannibelle T. Chua Co and Louella D. Desiderio