THE Philippines would likely sustain a higher inflation rate, meriting an uptick in interest rates this year, according to Union Bank of Switzerland (UBS).
In its Asian Economic Comment, UBS said Philippine inflation would hit 4.1 percent this year, higher than the Bangko Sentral ng Pilipinas’ (BSP) projection of 3.6 percent.

“Starting from three percent in December this means five percent inflation by end 2011. The good news is that consensus inflation expectations are already in a similar position, and that this variation would still be within the BSP’s target range,” UBS said.

“This means that while the BSP should respond, the central bank need not move too aggressively tighten and could probably even wait a few months before appearing ‘behind the curve,’” the investment bank said.

The higher inflation forecast would result from fuel prices which increased twice in late December by four to six percent, higher toll and taxi rates over the new year, bread and sugar price increases, and a 10-percent hike in electricity rate, UBS said.”We believe that Philippine monetary conditions are loose, but also note that neither credit nor money growth are strong. Likewise while surveyed manufacturing capacity utilization is high, we do not think capacity in the whole eco-nomy is unambiguously tight,” the foreign lender said.

UBS said that the low interest regime that the country is enjoying would likely be shaken by an increase of 100 basis points, which will have a gradual effect starting in the second quarter of the year.

This increase, the bank said, would likely be in conjunction with reserve ratio increases.

“We doubt the BSP will allow itself to fall behind the curve and project policy rate increases of 100 basis points this year in 25 basis points steps possibly in conjunction with reserve ratio increases, starting in the second quarter,” the foreign lender said.