Standard Chartered Bank said it expects Philippine inflation to average 5.5 percent this year but doesn’t see the central bank raising its rates.

The British banking giant said the Bangko Sentral ng Pilipinas might resume easing only in early 2009, with inflation falling to five percent.

"From the external front, we now expect the Fed to pursue a more moderate easing course given less-than-expected stress reported in the latest round of financial results in the US," Simon Wong, economist of StanChart, said.

"This should allow the BSP to have more flexibility in the near term to re-position itself as it manages an increasingly precarious growth-inflation balance at home," he added.

StanChart is expecting the Fed to cut its key rate by 25 basis points each in April, June and August.

Wong said the Philippines’ external sector has "held up well against recent financial turbulence," with exports and remittances still gaining in the first two months.

The sector may "weaken in the coming months as the US recession deepens." Yet, Wong said, "the receding risk of an immediate collapse in external demand has taken away the urgency for the BSP to match the US interest cycle tic-for-tac."

The BSP last week kept its key rates unchanged at five percent and seven percent for overnight borrowing and lending, respectively, under reason that current risks to inflation are emanating mostly from supply-side pressures.

Monetary authorities described the current policy stance as "neutral" because they are still waiting for data to validate the need for any policy action.

StanChart noted that the BSP’s focus has now shifted to inflation from growth, given the "increasing risk of a wage-inflation spiral."

StanChart said the BSP’s statement that it has "the will and capability to hike rates clearly aims to

give wage settlers leverage in the coming wage rounds."

"Shifting towards a neutral stance under currnt circumstances will also broaden the bank’s policy options should eventual wage concessions prove inflation-hostile," Wong said.

StanChart said it sees inflation to hit six percent in the second quarter, 5.5 percent in the third quarter and five percent in the last quarter.

Inflation averaged at 5.6 percent in the first three months.

The bank sees the BSP’s key rate remaining at five percent for the rest of the year, with a cut to 4.75 percent likely in the first quarter of next year.

Provided that wage growth can be restrained at a benign level, we expect inflation to retreat below 5 percent in 2009, allowing the central bank to resume easing," Wong said.