Monetary authorities are expected to cut policy rates by 25 basis points twice in the first semester, bringing down the overnight rate to 4 percent amid benign inflation expectations, according to DBS Group.
The financial services firm said in a research note that Philippine headline inflation has started to trend lower after peaking at 5.2 percent year on year last October.
Data from the National Statistics Office showed that the rise in consumer prices settled at 4.2 percent in December, bringing the 2011 average to 4.8 percent.
“Price pressures in the coming months should remain benign amid a slowing global economy,” the DBS paper said. “Higher food prices from crop damage notwithstanding, we expect headline inflation to trend toward 4 percent by March.”
The Singapore-based group said it expected inflation to average at 4 percent for the full year.
DBS observed that while the Bangko Sentral ng Pilipinas has been reluctant to ease monetary policy at its last meeting in December because of concerns about food prices, it should become more comfortable with cutting the overnight borrowing rate after three consecutive months of slowing headline inflation.
“We see one 25-basis point rate cut each in the first quarter and second quarter before the policy rate is held constant at 4 percent for the rest of the year,” DBS said.
Last week, BSP Deputy Governor Diwa Guinigundo said that, considering the 2011 average, monetary authorities were looking at containing inflation for 2012 at between 3 percent and 5 percent—the same as last year.
Guinigundo said the new targets would be announced soon, although the Monetary Board has yet to approve the figures.
“The adjustment, for sure, will not be very significant [since] an inflation target is a normative target regardless of the base year,” Guinigundo said.
“Five percent is 5 percent regardless of the base year so why should you target a high inflation rate?” he added.
Guinigundo said this meant that the target for 2012 should be “more or less” 3 percent to 5 percent.