Philippine inflation rate is projected to be slightly higher at 3.6 percent for full year 2013 compared from the recorded rate last year, according to a report released by the research department of the Metropolitan Bank and Trust Co. (Metrobank).

In The Economic Weather Report 1Q 2013 Outlook and Forecasts, Metrobank said that the prices of global commodities remained elevated even amid some easing throughout the year.

The bank cited headline inflation for December which came in slightly higher at 2.9 percent, averaging to 3.2 percent for full year 2012.

“The slightly higher December figure was mainly attributed to tight domestic supply conditions, triggered by the recent weather-related production disruptions, as well as the onset of holiday season demand led to higher retail prices of food, particularly rice, fish, fruits, vegetables, and meat.

Meanwhile, non-food inflation went down given lower charges for household electricity rates due to lower demand,” it noted.

Meanwhile, Metrobank also reported that global crude oil prices fluctuated in 2012 as weaker demand pushed prices down, while heightened geopolitical risks in several oil producing countries put upward pressure on prices.

“Severe droughts and poor weather this year in the US, Russia, Ukraine and Kazakhstan resulted to higher maize and wheat prices. Metal prices continued the downtrend as demand for base metals remains weak,” it stated.

The bank warned that the see-saw in commodity prices is seen to persist until 2013 amid a number of push and pull factors, adding that the downward pressure on commodity prices is seen to persist amid macroeconomic headwinds.

“However, given that markets are very tight, even relatively minor supply shocks may easily cause new price spikes,” it added.

Despite external threats, Metrobank said that Philippine inflation is seen to slightly inch up, albeit still manageable, amid some expected tightness in the supply of some domestic commodity sectors.

“The stronger peso and stable global commodity prices will, however, temper any significant increases in consumer prices,” it further said.
Interest rates

On the other hand, the bank also projected that interest rates are seen to remain subdued, with the longer end of the yield curve likely to move sideways with a downward bias on the back of rosy economic prospects, high market liquidity, expectations of a narrower deficit gap, and manageable inflation this year.

It continued that increased government spending is expected early this year on the run-up to the May elections. As of June 2012, the deficit ceiling for 2013 was pegged at P241 billion or 2 percent of gross domestic product.

In terms of policy rates, Metrobank researchers sees a 25 basis point hike in policy rates this year on probable demand-pull inflation effects.

“At its last meeting for 2012, the Monetary Board [MB] decided to keep policy rates steady, with the overnight borrowing rate still at 3.5 percent and the overnight lending rate still at 5.5 percent. The MB has cut rates by a cumulative total of 100 basis points since the start of the year,” it mentioned.

In addition, the bank announced that the peso may reach P39.40 by yearend, which will be supported by the solid take up of capital flows and still robust overseas Filipino workers remittances.

“A steep appreciation, however, is not seen as the BSP [Bangko Sentral ng Pilipinas] continues to intervene and smoothen exchange rate volatilities,” it added.