DBS predicts ‘extended sweet spot’ for country

The Philippine economy remains in an extended sweet spot considering the strong outlook for growth and the prevailing low-inflation environment, according to the DBS Group.

The financial service provider said in a research note that such an environment enables the Bangko Sentral ng Pilipinas to maintain low policy rates over the short term.

“Notably, the latest inflation print came in at just 3.4 percent year-on-year and this figure is actually skewed higher due to an increase in sin taxes,” DBS said.

Earlier this week, the National Statistics Office reported that inflation inched up to a six-month high, mainly due to a 29-percent uptick in prices of tobacco and alcohol following the implementation of jacked-up excise tax rates.

Another major factor cited was the continued rise of the heavily weighted food and non-alcoholic beverage group in the consumer price index.

“With no growth or inflation worries in the immediate term, BSP has focused its attention on handling portfolio inflows that have resulted in the peso turning in one of the best performance against the greenback among Asian currencies last year,” DBS said.

“While interest rate differentials are not the only factor affecting portfolio flows, the fact that inflation is low and that credit growth has been moderate imply less constraints on the BSP,” the bank added.

The Singapore-based bank reiterated its projection that the domestic economy will grow at a “relatively fast” 6 percent this year even if demand-driven upward pressure on inflation might be observed later in the year.

Economists at the state-run think tank Philippine Institute for Development Studies (PIDS) is more optimistic, pegging 2013 growth at a projected 6.2 percent although this is at the lower end of government economic managers’ assumed range of 6 percent to 7 percent.

According to PIDS, growth this year will be “in the range of uncertainty in terms of implications for sustainability.”

In an earlier research note, DBS said more signs of inflation are likely to appear amid robust economic growth, especially once construction for public-private partnership projects kicks in.

The bank added that oil prices will be another factor to watch considering that signs of stabilization in the major economies have led to higher oil prices over the last few months. On top of that, some pass-through effects on consumer prices are inevitable due to limited subsidies on fuel.

Also, DBS continues to expect a 25-basis-point rise in key policy rates “by the end of the year.”

This will push the overnight borrowing rate to 3.75 percent and the overnight lending rate to 5.75 percent.