MANILA, Philippines--AFTER STAYING well below target last year, inflation is expected to break into the 4-percent territory this year amid soaring oil prices in the world market.

In its 2008 outlook, think tank Global Source said the inflation rate would hit an average of 4.1 percent this year. This is still within the government's official target range of 3 percent to 5 percent.

Last year, the average inflation rate was 2.8 percent, well below the official target of 4-5 percent.

But Global Source said oil prices were seen to continue rising this year and this might prompt the labor sector to demand higher wages. Wage increases could push aggregate demand up and accelerate the rise in inflation, it added.

Inflationary pressures, however, would be tempered by the continued appreciation of the peso and the slowdown in overall growth due to weak exports, it said.

The group expects the peso to move way past the 40-to-a-dollar mark this year and remain one of the strongest currency in Southeast Asia. The sharp rise of the peso is due to both the weakening of the dollar amid the slowdown of the US economy and the rising inflows of foreign exchange remittances and portfolio investments.

The strengthening of the peso makes imported goods, including oil, cheaper in local currency terms, thereby tempering the increase in domestic prices.

"Policy rates (by the Bangko Sentral ng Pilipinas) will likely be kept on hold in the early months of the year as inflation pressures rise, but will eventually be loosened as prices stabilize," said Global Source in a paper written by its analysts, former finance undersecretary Romero Bernardo and Margarita Gonzales.

The BSP's overnight borrowing and lending rates stand at 5.25 and 7.25 percent, respectively. Should the US Federal Reserve loosen its monetary policy some more, Global Source said, the BSP, the Philippine central bank, is expected to do the same to maintain the existing interest rate differential.

"Monetary authorities are widely expected to mimic Fed policy cuts as there is strong pressure to keep the peso from overly appreciating," Global Source said.

The US Fed rate stands at 4.5 percent.

The BSP would not want its borrowing rate to be much higher than that of the Fed, Global Source said. Doing so will encourage sharp dollar investment inflows, which could further strengthen the peso and hurt the export sector.

But Global Source said the BSP's tendency to loosen its monetary policy this year would be limited because inflation was not expected to be as benign as last year.