Weak peso won't push inflation up - StanChart

Posted at 01/28/2014 6:21 PM

MANILA, Philippines - British banking and financial services giant Standard Chartered said a weak peso will not push inflation upwards, even as the peso has been Asia's worst performing currency over the dollar.

The peso has been the the worst performing Asian currency against the US dollar in January, dropping 1.86% year-to-date. On Tuesday, the peso stood at P45.23 against the dollar.

"However, we do not think this weakness will translate into domestic price pressures. The Philippines remains a domestic market-oriented economy, with exports and imports equivalent to only 62.8% of GDP in Q3-2013 (versus 158.9% for Malaysia)," Standard Chartered said in a report.

However, the weak peso will have a big impact on the price of fuel products. "The greatest impact of a weaker PHP is likely to be on energy inflation, as Brent crude becomes more expensive in PHP terms," it added.

Standard Chartered said commodity price fluctuations will have a bigger impact on inflation that the peso alone.

"Pure FX fluctuations alone do not appear to have led food and energy inflation. At the same time, domestic food inflation is decoupling from international food prices as the Philippines become more self-reliant in terms of rice and corn. Our commodities analysts expect Brent to end 2014 at $108/bbl (from c.$107/bbl currently). Agricultural product prices are also forecast to remain range-bound. As a result, we see limited upside from energy and food inflation in 2014," the report said.

Standard Chartered said it is maintaining inflation forecast of 3.9% for 2014, versus 3% in 2013.

"We expect inflation to rise from 3.5% in Q4-2013 to 3.9% in Q1-2014, 4.2% in Q2, and 4.3% in Q3, before falling to 3.3% in Q4. Inflation is likely to peak in Q3, but remain below the 5% upper end of Bangko Sentral ng Pilipinas' (BSP's) CPI inflation target. We therefore expect policy rate hikes only in Q3 and Q4 this year, by a total of 50bps to 4% by end-2014," it said.