HSBC expects the Philippines to enjoy a moderate rate of increase in consumer prices this year, giving policymakers more room to reduce interest rates further.
The bank said inflation would likely fall within the government’s target range of between 3 and 5 percent this year.
“The outlook for inflation for the rest of this year is favorable, with price pressures expected to stay within the target throughout 2012,” HSBC economist Trinh Nguyen wrote in the bank’s latest report.
Last year, inflation averaged at 4.8 percent, well within the same target of 3 to 5 percent. Last month, inflation stood at only 3.9 percent.
HSBC’s inflation forecast reflects that of the Bangko Sentral ng Pilipinas.
The moderate rise in consumer prices may be driven by the lingering problems of the global economy, particularly the debt crisis in the euro zone, which has badly affected Philippine exporters.
Also, a slowdown in remittances, however slight, may exacerbate inflation risks. But HSBC said remittances, which fuel demand of households for goods and services, would remain significant this year.
“Looking ahead, we expect remittances to stay strong in 2012, albeit expanding at a slower pace of 5 percent,” HSBC said.
In 2011, remittances hit a record high of $20.1 billion, rising by 7.2 percent from the previous year’s $18.3 billion.
Growth in remittances, which came about despite the problems plaguing most advanced economies, was attributed to sustained demand for Filipino workers in alternative labor markets abroad. Also, quite a number of OFWs have jobs that are not affected by the troubles offshore. More and more migrant Filipinos work as nurses and educators, among others.
HSBC believes that the Bangko Sentral ng Pilipinas will reduce interest rates further, following a 25-basis point cut implemented last month. As a result, key policy rates now stand at 4.25 and 6.25 percent for the overnight borrowing and lending rates, respectively.
The BSP expects that the reduction of key rates, which influence commercial interest rates, will help spur demand for bank loans.
With bank loans on the rise, people are encouraged to consume and invest more, stimulating growth of the overall economy.
But HSBC said that, although lower interest rates tend to accelerate inflation, any increase in consumer prices would not breach the official target.
The economy, measured in terms of gross domestic product, grew by 3.6 percent last year, slowing down from the 7.6 percent registered the previous year.