MANILA, MAY 7, 2008
(STAR) By Des Ferriols - Runaway prices of fuel and basic goods, particularly rice, jacked up inflation to a near three-year high of 8.3 percent in April, sparking fears that the central bank might raise key policy rates by as much as 75 basis-points.

Some economists projected that the inflation rate would peak at nine percent.

The National Statistics Office (NSO) reported yesterday that the increase in the prices of vital food commodities led to the dramatic rise in the inflation rate compared to 6.4 percent in March. Inflation a year ago was 2.3 percent.

“The uptick was projected but the magnitude was higher than we expected,” Bangko Sentral ng Pilipinas Governor Amando Tetangco told journalists from Spain, where he is attending the annual meeting of the Asian Development Bank.

He said in a text message the April rate brought the average inflation to 6.2 percent for the first four months of the year, significantly higher than the projected full-year average.

The year-to-date average was also dramatically higher than the whole year target of three percent to five percent.

“As base effects dissipate and as measures to stabilize supply take root, we remain convinced that price movements will return to manageable levels over the policy horizon,” Tetangco said.

“We will however continue to closely monitor developments for any second-round pricing pressures and will act decisively to ensure that inflation expectations remain well anchored,” he said.

Tetangco declined to comment on the possible policy response from the BSP but he admitted the swollen prices of oil and non-oil commodities “posed a challenge for monetary policy-makers.”

Data from the NSO showed an 11.4-percent acceleration in the prices of food, beverages and tobacco.

Acting Socioeconomic Planning Secretary Augusto Santos said that food prices expanded by a whopping 12 percent last month.

“Rice alone increased by 24.6 percent, while corn increased by double-digit rates compared to the previous month,” Santos said.

For rice alone, 11 of the 17 regions posted double-digit month-on-month inflation rates, the highest of which was in Central Visayas at 18.6 percent.

Historically, this is the highest nationwide increase in rice prices since the 11.5 percent rise from December 1998 to January 1999.

Prices of other major food items such as cereal preparations, he said, rose by 2.5 percent, while those of dairy products rose by a little over one percent. Prices of meat rose by 2.6 percent.

“In contrast, prices of fruits and vegetables continued to decline by roughly 2.4 percent for the second straight month,” Santos added.

Higher electricity prices also contributed to inflation, increasing by 3.9 percent from the previous month, as Meralco charged P0.67 more per kilowatt-hour as a result of higher generation, transmission and systems loss charges.

According to the NSO, the April inflation rate was the highest since May 2005 when the rate was recorded at 8.5 percent. Unlike this year, however, the rate was declining at the time.

The government has been trying to ease price pressures in the capital in the belief that areas outside Metro Manila have little or no supply pressures. The April inflation in these areas, however, surged to 8.7 percent in April.

Excluding selected food and energy items, the NSO said core inflation also went up to 5.9 percent in April from 4.8 percent in March.

“This suggests that price pressures are not only confined to the traditional headline components of food and energy,” said Frederic Neumann, head of the Asian Economics Team at HSBC in Hong Kong. He added that the surge reflected robust domestic demand growth and the lagged effect of high money supply growth over the past year.

“Base effects, rising food prices, and a likely further hike in gasoline prices are bound to push the headline rate higher in the coming months, which we expect to peak at well over nine percent,” Neumann said. “We therefore stick to our forecast of an average inflation rate of 6.5 percent for 2008.”

The emerging trend in inflation rate, according to Neumann, indicates that the BSP can raise its policy rates by 25 basis points when the Monetary Board meets in June. He said this could be followed by another 50-point hike over the subsequent two quarters, with the policy rate reaching 5.75 percent by year-end.

“We believe it would take longer for inflation rate to start coming down because the increase has not been due to supply shocks but rather due to rampant demand,” Neumann pointed out.

He said agriculture production is going up but not fast enough to catch up with demand. “Even here consumption of food is going up,” he said.

Across Asia, soaring prices for food and fuel are triggering inflationary pressures.

Central banks face the dilemma of whether to raise borrowing costs or not. Higher rates could calm inflation, but they could also undermine economic growth at a time of global uncertainty.

The BSP kept its overnight borrowing rate at five percent and its lending rate at seven percent last month, but flagged a future increase if inflation spread to the broader economy, particularly through wage increases.

Raising borrowing costs next month could put the brakes down harder on an economy where growth is already expected to slow to 5.8 percent this year from a 31-year high of 7.3 percent last year.

The BSP is closely monitoring negotiations to raise the minimum daily wage and has warned that a rise of more than P25 could force it to reassess its inflation forecast.

But since consumer prices in the first four months of 2008 have already risen 6.2 percent from the same year earlier period, analysts say the central bank’s full-year inflation target of 3-5 percent already appears to be blown out of the water. With Ted Torres

Chief News Editor: Sol Jose Vanzi

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