Philippines’ inflation to soar 3.5%: OCBC Bank

Government to take precautionary measures against excessive capital inflows.

According to OCBC Bank, its inflation forecast for 2013 stands at 3.5%, higher than the official estimate of 3.0%, and it expects a possible 25bps rate hike in the benchmark policy rate later this year. 

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The BSP has rather explicitly indicated that its priority in the near-term is to continue watching capital flows into the country, as the central bank stated the possibility of further macro prudential measures if necessary. The lowering of interest rates in the SDA account is clearly aimed to reduce the cost of sterilizing further capital inflows, indicating a strong intention to remain active in the market.

With the risks on growth-inflation front staying somewhat balanced, expect the central bank to remain active in preventing excessive capital inflows, although it should also be noted that an aggressive intervention is still not yet in the offing given the structural nature of these flows.

Interestingly though, there was a slight trace of hawkishness in the policy statement, given that the central bank cautioned over the inflationary risks from excessive capital inflows, and we think that this is something crucial to monitor moving forward. At this juncture, our inflation forecast for 2013 stands at 3.5%, higher than the official estimate of 3.0%, and we expect a possible 25bps rate hike in the benchmark policy rate later this year.