By DES FERRIOLS
The Philippine Star

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the period of relatively high inflation would last longer than originally expected this year and possibly in 2009.

Tetangco said Thursday that high commodity prices as well as the prolonged volatility in crude oil prices would extend the hump seen by the BSP earlier.

According to Tetangco, the BSP expects the inflation rate to trend upwards until the second half of the year but said emerging indicators show a longer hump.

"The forecasts are being reviewed but the most recent runs show that the hump could extend because of higher oil and commodity prices," Tetangco said.

However, Tetangco said the BSP fully expected the inflation rate to be within the official government target, at least for 2009.

This year, the inflation target has been pegged at three to five percent and by 2009, the rate was targeted to ease to the 2.5-to 4.5-percent range.

The BSP’s original projections, however, placed the 2008 average inflation rate at 3.5 to 4.4 percent before going down to an average of 2.1 to 3.3 percent in 2009.

But Tetangco said the BSP was reviewing its projections to consider the movements in commodity prices brought about by the tight supply in grains not only in the Philippines but throughout the region.

Tetangco said the main factors that could tame inflation would be the strength of the peso, with the country’s balance of payments expected to sustain a healthy surplus.

This year, the BSP expects the country’s BOP surplus to reach $3.4 billion, sustaining the level it had in 2007 as a result of steady foreign exchange inflows from investments, remittances and exports.

The BSP, however, also has to contend with rising global liquidity as central banks around the world, particularly in developed markets, opted to ease their monetary policies to avert economic slowdown.

Hong Kong-based economist Frederic Neumann said risk aversion was dampening the rise in global liquidity but as nerves start to calm down in the coming months, he said significant capital inflows into Asian emerging markets should be expected.

According to Neumann, this added an inflationary dimension to the rate cuts of the US Fed, particularly since Asian economies appear exposed to another wave of liquidity on the back of Fed cuts.

"We already have a bit of an inflation scare in Asia, with headline readings across the region surprising on the upside over the last few months," Neumann said.

According to Neumann, this in part reflected what he characterized as an "overly loose monetary policy" in the region.

Neumann said Asian central banks were unable or at least unwilling to tighten monetary conditions as long as the Fed was on an easing path.

"This represents a fundamental policy dilemma for Asia," Neumann said. "Sooner or later, however, either inflation will have to ease, possibly due to the dampening effect of the US slowdown, or Asian central bank’s will have to tighten more aggressively, seeing their currencies rise in the process."

Tetangco has already expressed concern over "imported inflation", admitting that the 2008 average inflation would be higher than 2007 when the national average inflation rate was recorded at 2.8 percent.

At the moment, Tetangco said the BSP’s decision to release funds parked in its SDA facility but according to Tetangco, the move would merely supply more funds that the system needed so that the net effect would not cause inflationary surges.