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Weakening of consumers’ purchasing power, or inflation, could
reach a two-year high in April and May this year as a result of
higher food and oil prices and utility charges, First Metro
Investment Corp. reported Thursday.
In a report, First Metro added that inflation
rates last month and this month are seen to pick up both at 7
percent because of accelerating price hikes in food items,
compounded by higher fuel and utility charges. The same factors
brought the inflation rate to 6.4 percent in March, or exceeding
widely consensus forecast.
In June, it said, inflation will marginally drop
to 6.9 percent.
“The sharp rise in food prices that appears to
have continued in April has alarmed some analysts to wonder if the
3-percent to 5-percent target of the government is still attainable.
To be sure, it is likely that year-on-year inflation rates may
accelerate further in April and May, but start slowing in June,”
First Metro added.
In the past few weeks, the Bureau of Treasury
had rejected short- and long-term debt papers, citing banks were
asking higher yields for their investments as a result of increase
in inflation.
Bangko Sentral ng Pilipinas Governor Amando
Tetangco Jr. said inflation in April is seen to range between 6.4
percent and 7 percent, as prospects for the year are “clouded with
risks.”
From February to March, inflation rates kept
exceeding central bank’s target range of 3 percent to 5 percent.
Last month, the rate reached 6.4 percent from January’s 4.9
percent.
Last week, Bangko Sentral kept interest rates
unchanged.
“Monetary policy will remain vigilant for any
early sign of second-round effects and possible disanchoring of
inflation expectations. The 2008 inflation outlook is clouded with
risks but the 2009 target of 3.5 percent plus or minus 1 percentage
point is achievable,” Tetangco said.
The government is scheduled to release inflation
figures next week.
Inflation is also expected to remain high if the
government will push for legislated wage increase, a Deutsche Bank
report said.
The bank’s Philippine Market report also on
Thursday warned that the danger from inflation would come from the
government’s response to high prices of rice.
It added that it considers the supposed rice
crisis as a non-core component of inflation and such crisis is
expected to pass a year later.
“The real danger lies in how the government
responds, if politicians press the panic button and respond to the
temporary shock with measures [such as] legislated wage increases
that outstrip productivity and growth. [The government and the
politicians] run the risk of triggering a supply chain reaction that
will be almost impossible to reverse,” Deutsche Bank strategist
Anton Periquet said.
Bangko Sentral has factored in a P25 wage
increase this year in its inflation target of 3 percent to 5 percent
for 2008. The Trade Union Congress of the Philippines had proposed
higher additional wage increase of P80 a day from the current
minimum wage of P362 a day.
High inflation is also seen to raise business
costs and reduce the value of household budgets.
For the business sector, high inflation will
affect company earnings, as interest rates are expected to move up,
possibly raising banks’ lending rates.
“Interest rates would rise gently, signaling
an end to the three-year easing cycle,” Periquet said.
Interest rates fell sharply between 2004 and
2007 as the government reduced the budget deficit.
“Runaway inflation is a more serious threat to
the Philippines than the [rice crisis]. Rice comprises 10 percent of
the consumer price index, or CPI, with all other food items
accounting for 51 percent.
Bangko Sentral forecast inflation to further
increase by 7 percent in April from 6.4 percent in March as a result
of prevailing high prices of oil and commodities, and the adjustment
in power rates.
It, however, expects inflation to slow down in
the second half of the year.
Michael Spencer, Deutsche Bank’s economist,
said the current weakness of the peso is temporary. The bank stuck
to its year-end peso forecast of P38.50 to the US dollar.
The peso currently trades around P42 to the US
dollar, having peaked at P40.51 in February. It appreciated 18
percent against the greenback last year.
Spencer said the government is expected to post
a budget deficit of P40 billion this year, inclusive of P30 billion
in privatization receipts.
A recent US Federal Reserve rate reduction gave
Bangko Sentral additional latitude in monetary policy to address
inflation.
Diwa Guinigundo, the central bank’s deputy
governor, said the Federal Reserve is clearly focused on dampening
recession and ensuring adequate liquidity.
The Fed cut its rate by 25 basis points to 2
percent, which was lower than Bangko Sentral’s overnight borrowing
and lending rates of 5 percent and 5.75 percent, respectively.
-- Chino S. Leyco and Maricel E. Burgonio
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