DBS sees ’08 inflation above central bank target

Inflation this year is expected to exceed the 3.0-5.0 percent target of the central bank, Singapore-based investment bank DBS said.
The central bank, Bangko Sentral ng Pilipinas (BSP), bases monetary policy principally on inflation.
Philippine headline inflation, based on movement of the consumer price index, averaged 2.8 percent in 2007. The official target was 4.0-5.0 percent.
In February it rose to 5.4 percent year-on-year in February, and for the year it is “unlikely to fall within the central bank’s target range,” DBS said in its latest economic assessment of selected countries.
The February inflation rate was the highest in 16 months.
Following that and the 4.9 percent recorded in January, the BSP has no room for monetary policy easing at the moment, DBS said.
If current price movements are sustained, it wouldn’t be a surprise if inflation reached 6.0 percent this year, it said.
Last year’s low inflation rate came despite record-high oil prices, and was due partly to the strengthening of the peso that tempered the rise in commodity costs.
Some analysts say inflation rates below 3.0 percent are a thing of the past, as price increases are seen accelerating this year especially with a volatile external environment.
The spike in inflation early in 2008 is blamed on continually rising world oil prices and disruptions in food supply.
The Monetary Board, the policymaking body of the BSP, last Thursday kept the central bank’s overnight borrowing rate at 5.0 percent. Its decision was expected by analysts and economists in view of projections of higher inflation this year.
DBS noted that interest rates on the 10-year Treasury bonds had risen 100 basis points from the 6.05 percent recorded early this year, indicating expectations of a rise in inflation.
Investors in government securities normally factor in their inflation outlook so that bond yields will not be eaten up by price increases.