Deutsche Bank said the rice crisis is passing and warned the government against panicky reaction like sharp adjustment in wages, which, it said, would only drive up inflation.

"At the end of the day, the rice crisis is a shock whose effects, like that of bird-flu in 2001, may become a distant memory a year later," Anton Periquet, strategist of Deutsche Bank, said in the bank’s April 30 review on the country’s rice situation.

"The real danger lies in how the government responds – if politicians press the panic button and responds to the temporary shock with measures that permanently increase costs – i.e., legislated wage increases that outstrip productivity growth – they run the risk of triggering a supply chain reaction that will be almost impossible to reverse," he said.

Runaway inflation, more than the subprime crisis, is a "serious threat to the Philippines, not just "raising business costs" but reducing the "real value of household budgets in an economy with a low savings buffer," he said.

"The effect on discretionary spending will be immediate, with negative implications on company earnings," the analyst said.

In a conference call the German bank conducted last week, Periquet said panelists were in a consensus that while there is a "clear supply-demand imbalance," "the crisis would pass."

"But at the same time, there was also a suspicion that the spike in world prices this year is in part being fueled by the Philippine government’s aggressive (and pre-announced) buying into a thin market, at a time when key suppliers Thailand and Vietnam were cutting exports," Periquet said.

Deutsche Bank noted that the Philippines is the world’s largest rice importer, and hence its pronouncements on supply shortages can send shocks to the market.

University of the Philippines Prof. Benjamin Diokno, a former budget secretary and one of the panelists at the conference call, pointed out that market forces would correct over time.

Diokno said at current prices, farmers were already planting more rice. Rice takes about 5-6 months to grow and is harvested twice a year. So, he said, in the absence of supply bottlenecks, shortages needn’t last for extended periods.

Periquet said the consensus was that "prices would at least halve before the end of the year."

He said, citing the observation of the panelists, the high rice prices have benefited the country’s rice-planting families, which constitute about 12 percent or 11 million of the country’s 90 million population.

"The consensus, though, was that the net effect on the economy would be negative, as practically everybody, including the rice farmer, is a rice consumer."

Diokno said as a result of the price increases, average inflation is likely to settle at six percent this year, topping the official target of 3-5 percent.

Consequently, as a result of consumer spending slowing from the erosion of their purchasing power, he said domestic growth is likely to come in at five percent, less bullish than the official target of 6.3-7 percent.