Global banking giant Citigroup expects Philippine inflation to reach 8.3 percent—nearly three times the 2.8 percent last year and potentially the fastest in 10 years. The Economist Intelligence Unit (EIU) has a more sober forecast: 6.8 percent, because of the unabated rise in global fuel prices.

The government is expected to release data on inflation, as measured by the consumer price index, this Thursday, a few hours ahead of a meeting of the central bank’s policymaking Monetary Board.

The central bank, Bangko Sentral ng Pilipinas (BSP), warned last week that inflation might have reached 9.6 percent in May after jumping to a three-year-high of 8.3 percent in April because of rapidly rising food and energy prices.

The EIU, a think tank providing advisory services to multinational companies, revised its inflation forecast for the Philippines from 5.8 percent, following the recent spike in prices of oil and rice. Both its original and revised forecasts exceed the 3.0-5.0 percent target ceiling the government had early on set for this year. Monetary authorities have admitted that the government target is no longer attainable, given the increasing oil prices.

“In the months ahead, the government will continue to add to the country’s rice stocks as one way of taming price pressures,” EIU said in its assessment of the Philippine economy. “But [the government] will find it increasingly difficult to procure enough of this staple food as the largest exporting countries in the region apply trade restrictions to safeguard their own supplies.”

As a response to rising consumer prices, the government recently ordered an increase of P20 in the daily minimum wage.

The EIU noted that wage hikes, although intended to help low-income families cope with the rising standard of living, could be expected to create inflationary pressures.

Citigroup’s economist for the Philippines, Jun Trinidad, said high inflation this year had led to expectation of high interest rates. But he noted that the risk of second-round inflationary effects might have been muted by a 5.5-percent adjustment in wages—lower than the level assumed by the BSP.

“The wage order probably weakened the market’s perception that another negative inflation update of more than nine percent in May would heighten the risk of policy rate tightening in the second half of 2008,” Trinidad said in a May 27 report.

A tightening in monetary policy refers to any action that involves mopping up liquidity from the system, such as adjustments in the BSP’s benchmark interest rates, in the interest rate on the BSP Special Deposit accounts, or in the reserves that banks are required to set aside from deposits and deposit substitutes accepted from the public.

The Citigroup report said easing global interest rates and diminishing risks of a US recession could have also reduced the central bank’s willingness to quickly hike rates.

The BSP’s overnight borrowing rate is currently at a record-low of 5.0 percent.

“We think policymakers are well aware that inflation pressure and financial risk aversion weigh on the outlook for private spending this year,” the Citigroup report said.

Citigroup expects the gross domestic product to grow 5.6 percent this year, compared with the 31-year high of 7.3 percent posted last year.

The EIU predicts GPD growth at 5.7 percent this year and in 2009.

In making its projections, the EIU has factored in the effects of high inflation on the country’s overall economic growth.

The Citigroup report said inflation would likely outpace economic growth throughout the year.

It projects an inflation rate of 9.2 percent in the second quarter, 9.6 percent in the third and 8.8 percent in the fourth.

For 2009, it predicts inflation will slacken to 6.3 percent.

The central bank’s 2009 inflation target range has a high of 4.5 percent. With a report from Agence France-Presse; edited by INQUIRER.net