Philippine inflation seen to average 3.5% in Q1, even less in Q2

MANILA, Philippines—Inflation is seen to average at a benign rate of 3.5 percent in the first quarter and to slow further in the second quarter, thanks partly to a modest rise of the peso that is tempering the increase in the cost of imports.

According to the “Market Call,” the monthly publication of the First Metro Investments Corp. in partnership with the University of Asia and the Pacific, the inflation environment will likely remain favorable at least in the next few months, and will thus allow policymakers to focus on boosting the growth of the economy.

So far, the Market Call saw no signs that the government’s inflation target would be breached.

The Bangko Sentral ng Pilipinas has set a goal to keep the average inflation for this year within 3 to 5 percent.

The target so far remains achievable, as actual inflation stood at 4 percent in January and at a much slowed rate of 2.7 percent in February. The average for the first two months thus stood at 3.3 percent.

“Inflation is seen to further decelerate, despite the surge in crude oil prices, as food prices are expected to be quite stable with good harvests in Luzon and Visayas,” said the Market Call.

“The peso-dollar rate appears to have an appreciation bias…,” it added.

The peso averaged at 42.66 against the US dollar in February, stronger than the 43.70 in the same period in 2011.

The Market Call said the peso would likely remain relatively strong, a projection consistent with the expectation of monetary officials of a robust foreign exchange inflows into the Philippines in 2012.

BSP officials said the inflows would continue to be led by remittances, which have been seen to rise on the back of sustained demand for Filipino workers by employers in various parts of the globe.

Inflows may also be led by foreign portfolio investments, which are seen to go to emerging markets like the Philippines given the economic and debt problems gripping eurozone economies and the still fragile US economy.

The foreign exchange inflows are seen to help keep the peso strong and temper overall inflation. A rise in the peso makes imported goods cheaper in local-currency terms.

“Over the policy horizon [over the short term], we expect inflation to be below the mid point of our target range of 3 to 5 percent,” BSP Governor Amando Tetangco Jr. was earlier quoted as saying.

The BSP expects inflation to average within the 3-percent territory this year.

The central bank’s favorable inflation outlook has prompted its Monetary Board to focus more on implementing policies that will speed up growth of the economy rather than temper rise in consumer prices.

The BSP, so far this year, has thus cut its key policy rates twice by a total of 50 basis points.

The reduction in the policy rates, which influence commercial interest rates, is aimed at boosting demand for loans, which are expected to support higher investments and consumption.

The policy rates now stand at historic lows of 4 and 6 percent for overnight borrowing and lending, respectively.

The economy slowed down to a growth of 3.7 percent last year from 7.6 percent in 2010.

The government aims to reverse the slowdown, setting an economic growth target of 5 to 6 percent for this year.