No reflation for PH – BSP

Published March 29, 2021, 6:09 PM

by Lee C. Chipongian

The Philippines is not experiencing reflation because inflation is largely supply-side driven and temporary, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

Reflation is the act of bringing inflation from very low levels back up to its long-term trend after a period of disinflation and economic downturn. “This is not the case,” he stressed.

“What we are seeing for the Philippines right now is not reflation. Instead, the higher inflation outturns in recent months are a result of transitory supply-side pressures on a narrow range of agricultural products such as meat and vegetables, as well as domestic fuel price increase,” Diokno told reporters during his weekly online press briefing.

The Monetary Board on Thursday, after deciding not to move the two percent key overnight rate for the second policy meeting in a row, has raised the inflation forecast for the year to 4.2 percent, breaching its two-four percent target, because of higher meat and oil prices.

The BSP, whose primary job is inflation-targetting, does not typically respond to supply-side shocks due to its short-lived nature. It is the government through non-monetary interventions such control of food prices that usually handle inflation situations from supply pressures.

“The elevated inflation trajectory in 2021 has not been demand driven as the economy is still recovering from the COVID-19 pandemic,” said Diokno, who is an economist.

He reiterated that headline inflation rose to 4.7 percent in February 2021 from 4.2 percent in January due to a sharp uptick in food prices resulting from cold weather conditions on domestic fish supply, as well as the end of the main harvest season for rice, and increase in international oil prices.

Diokno also noted that meat inflation is still on the high side because of the African Swine Fever although it has eased month-on-month due to price ceiling on pork and chicken.

“Looking ahead, inflation outlook suggests an eventual deceleration over the policy horizon,” he said. “Inflation is projected to accelerate above the high end of the target range until the third quarter of 2021 due to the transitory impact of supply-side price pressures. But it is then seen to fall below three percent, the midpoint of the target range by end-2021 and first quarter of 2022. It is expected to average at about 2.8 percent for the whole year of 2022 as global oil and non-oil prices start to moderate.”

For now, Diokno said monetary policy stance is appropriate, and pointing to the government’s non-monetary measures as the main game at this time, to take care of food supply issues.

“The issue with reflation is linked to the strength and pace of recovery and the forward guidance of some central banks that accommodative monetary policy stance will be maintained as needed to support the recovery,” said Diokno.

He again said that so far, there is no evidence of second-round effects to inflation, which are usually wage and transport fare increases.

“(Inflation) requires mainly non-monetary responses such as measures to address domestic food supply concerns. That said, the BSP remains vigilant against potential second-round effects from supply shocks. At the same time, the BSP reaffirms its commitment to complement the government’s broader initiatives to limit lasting adverse impact of the COVID-19 health crisis on the domestic economy,” said Diokno.

Policy responses will still focus on “closing the output gap given the substantial excess capacity and unemployment.”

“Accordingly, the BSP’s monetary policy stance will continue to be supportive of domestic demand while the economy is in its nascent recovery phase,” the BSP chief added.