Slower economic growth, rising prices seen in ’14

Economic growth is seen to slow down to 6.1 percent this year, from the estimated 6.9 percent in 2013, partly due to the devastation caused by Supertyphoon “Yolanda” and the possible decline in consumption in view of the rise in inflation, Ayala-led Bank of the Philippine Islands said.

But despite a likely increase in inflation, BPI does not expect the Bangko Sentral ng Pilipinas (BSP) to increase key interest rates this year, based on macroeconomic assumptions supporting the bank’s 2014 profit forecasts.

“The BSP, although currently employing an inflation targeting framework, is not expected to raise interest rates in 2014 as the projected increase in inflation will mainly be supply-side driven. Under the inflation targeting framework, the BSP will only resort to hiking interest rates if rising inflation is brought about by demand-side pressure,” the bank said.

“As such, we do not expect any changes to both the policy and SDA (special deposit account) rates, while the BSP may decide to maintain financial stability through the deployment of macro prudential measures as they see fit,” it said.

In 2013, the bank noted that headline inflation prior to the Yolanda episode averaged 2.8 percent, with inflation dipping below the BSP’s 3- to 5-percent target for seven out of 10 months.

But the bank said the ill effects of Yolanda would likely surface in Philippine inflation in the next couple of months, as supply side disruptions push the prices of commodities higher. As such, BPI is expecting full-year 2013 inflation to breach the 3-percent level while it expects 2014 inflation to hit 3.5 percent.

The aftermath of Supertyphoon Yolanda is seen gnawing at growth momentum.

“Philippine growth is expected to be slowed to some extent by the recent typhoon due to the loss of output in affected areas and foregone consumption as inflation is expected to pick up. That being said, Eastern Visayas comprises a fraction of national output as growth remains NCR (National Capital Region)-centric. Furthermore, reconstruction efforts are expected to provide a boost and compensate for the loss of consumption,” the bank said.

In the meantime, as the US Federal Reserve tapers its liquidity-inducing bond buying operations, BPI expects the return of the trend of strong US dollar while emerging market currencies may retreat.

“Although the Philippines continues to enjoy a healthy external position, solid economic fundamentals and a structural stream of foreign currency flows, thanks to the overseas Filipino and business process outsourcing route, we expect that the pressure to remain competitive in the region will keep US dollar-Philippine peso (exchange rate) in the middle of the regional norm,” BPI said.

As such, BPI said it expected the peso to average this year at 44.173 to $1 and to settle at 44.60 by the end of the year.