Philippines inflation pegged to hit 3%

Banks likely to adjust asset mix.

According to DBS, despite robust economic growth, inflation has stayed muted forthe most part ofthe past twelve months. Stable food and energy prices have been key factors behind the benign inflation numbers.

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Notably, a breakdown of CPI indicates that the increase in sin taxes early this year was the biggestfactor why consumer prices are going up in levelterms. The low inflation environment is expected to persist in the short term. We expect inflation to reach 3.0% YoY in April and project a mild up drift through the rest of this year.

Loan growth will be criticalto watch. In order to encourage banksto divert funds away from the special deposit accounts(SDAs),the central bank (BSP) has cut the SDA rate by a cumulative 150bpsthis year.

While the effect has not been felt yet, banks are likely to adjust their asset mix (including providing more loans) in the coming months. This will eventually translate into price pressures down the line.