By JUDITH BALEA
abs-cbnNEWS.com

Singapore-based DBS Bank has raised its full-year inflation rate forecast for the Philippines from 3.5 percent to 5.0 percent, the upper end of the central bank's target range.

In its quarterly report, the bank said rising fuel and food prices would keep pushing inflation higher, with the consumer price index set to peak at 5.8 percent in May. DBS sees crude oil prices to average $85 per barrel this year.

"As prices rise, the BSP (Bangko Sentral ng Pilipinas) will also be reluctant to cut interest rates, and risks are that it may in fact consider raising interest rates from the end of the second quarter of 2008," it said.

According to DBS, the peso may help temper costs of imported goods but domestic demand may still trigger a hike in commodity prices.

On Thursday, the BSP kept headline interest rates unchanged at 5.0 percent for overnight borrowing and 7.0 percent for overnight lending following high inflation in the first two months. Annual inflation accelerated to 4.9 percent in January and 5.4 percent in February, the fastest since October 2006.

Spending to slow

Consumers are likely to show reluctance in spending this year due to high prices of goods and a US-led global economic downturn, DBS said.

It predicts consumer spending to moderate to 5.7 percent this year from a 19-year high of 6.0 percent in 2007.

"High fuel and food prices will likely keep driving inflation higher in the months ahead, reducing real wage gains and purchasing power."

DBS said a slowdown in the US would also impact the Philippines negatively because it accounts for 53 percent of the country's remitted earnings and 17 percent of the total export bill.

"Going forward, with businesses also becoming more cautious, it is unlikely that consumer spending will be able to find the same kind of support from jobs and wages as it did in 2007."

DBS expects the peso to remain strong, diminishing the value of remittances from overseas Filipinos in peso terms.

For 2008, DBS is maintaining its gross domestic product projection of 6.6 percent for the Philippines.