Rate of rise in prices seen to weaken steadily

Philippine inflation is expected to weaken steadily over the next three months after peaking in October. This development may prompt monetary authorities to ease rates in the next four months.

Singapore-based DBS Group said in its latest research note that the Bangko Sentral ng Pilipinas could adjust policy rates sometime in the next four months.

The adjustment could bring the BSP’s overnight borrowing rate to 4 percent, DBS said.

In the first quarter of 2012, DBS expects a 25 basis-point cut before the BSP holds the rate constant for the rest of the year.

“Inflation should have already peaked at 5.2 percent in October and should start trending lower towards 4 percent by February next year, food price pressures from crop damage notwithstanding,” the financial services firm said.

“With inflation unlikely to pose a threat just yet, growth concerns will dominate. Moreover, liquidity conditions have also tightened in the last few months.”

DBS said further that the central bank would likely factor in the worsening euro zone crisis, the drop in export earnings and, most importantly, the weak gross domestic product growth rate in the third quarter.

Earlier this week, DBS announced it would again reduce its Philippine GDP growth forecast for the year to 3.6 percent from 4.2 percent.

The group said that with third-quarter growth reaching only 3.2 percent, and with the January-September growth settling at 3.6 percent, “even the lower band of the government’s 4.5 percent to 5.5 percent revised target range is probably out of reach.”

DBS blamed the poor export performance in the third quarter for exerting the greatest downward pressure on GDP growth.

DBS said that the third-quarter decline of 13.1 percent year-on-year in exports was comparable to the performance in the first semester of 2009, when the Philippines felt the brunt of the global financial crisis.