By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said politics and economics – both in the local and global context – have become more entwined that central banks have had to adjust monetary systems to be more responsive, relevant and timely.
The BSP itself – beset for months with high inflation and an elevated inflation expectations amid a ton of upside risks that could hit it on all sides – was extremely vigilant in its inflation management and has “enhanced our existing monetary framework and operations to make our policies more responsive to emerging challenges,” said Guinigundo.
“We recognize that economies have evolved to be extensively interconnected and open. As such, price and financial stability is no longer affected by normal dynamics of demand and supply of goods and services, but also by non-economic factors such as politics, the speed of technological innovation and even geopolitical conflict,” he told participants of the recently-held 2018 Pilipinas Conference in Makati. “Thus, we have been sharpening continuously our frameworks to consider these emerging trends and tipping points.”
Guinigundo said the BSP, more than any central bank in the world and especially in the region, has actively and aggressively pursued financial inclusion and expanded on inclusive growth for these very reasons. “We have proactively engaged in dialogues relating to the issue of inequality. While it could appear for now as a non-monetary concern, we have witnessed how this issue could later on transform itself into a major disruption if it feeds into political unrest or dissatisfaction.”
Inclusive growth has been integrated as one of the BSP’s focused programs, along with its traditional objectives of price stability, financial stability and an efficient payments and settlements system.
It is on these “no one is left behind” principles that Guinigundo reiterated the BSP’s intention of using technology and digitisation to expand inclusive growth. With financial technology or fintech solutions, financial services in the country could be extended to the unbanked and the underbanked at a cheaper cost, he said.
Guinigundo said the central bank’s focus on income inequality is an affirmation of its price stability goals, and they strive at all times to look at the bigger picture, not just piecemeals or when the market has an adverse reaction to one factor to the exclusion of all else.
“In an emerging and developing economy like the Philippines, keeping prices within target benefits the poor most, specifically the lowest income classes of the population,” he said. The BSP carefully monitors inflation rates for the poorest segment of society and are “cognizant of the difference in their basket of goods and economic behavior,” Guinigundo added. “We observe that this segment relies heavily on the ability of monetary policy to rein in inflation, especially because they feel a heavier brunt if we miss the target. Hence, monetary policy directly affects the people’s welfare and, in turn, affects economic opportunity and income distribution.”
During the conference which was hosted by Stratbase ADR Institute, Guinigundo said the “science of economic policy involves the politics of economics and the economics of politics” and that more starkly, “bad politics begets bad economics” and vise versa.
“This interaction has been particularly evident in the current economic environment where uncertainty has remained elevated,” said Guinigundo. He cited Brexit, and the US-China trade rift as examples. “Certainly, these political events could have adverse effects on economic growth… These shocks can lead to transitory capital flow volatility and bouts of financial market turbulence,” he observed.
Volatile capital flows will affect monetary policy in that it will “pressure policymakers to respond to a broader range of developments without the necessary tools at their disposal” and that “domestic interest rates could become more sensitive to external forces which, in turn, could potentially weaken monetary authorities influence on asset prices and aggregate demand,” said Guinigundo.