Two real threats to growth and inflation


Diwa C. Guinigundo

In Pulse Asia’s latest survey covering quarterly rating from September 2020 to September 2021, the Duterte administration scored the lowest approval in controlling inflation. From September 2020’s rating of 63 percent, controlling inflation slumped to only 37 percent in September 2021, or a 26-percentage- point drop, the biggest among the 14 key national issues.

Inflation management seems a big failure because this is the aspect of governance closest to people’s guts during this pandemic. Very few would appreciate the difference between higher prices and higher inflation; all they know is that a kilo of pork this month is ₱50 higher than last month. But it is possible to have a moderating inflation if such a ₱50 monthly increase is lower than the adjustment in the month before.

It is also difficult for people to realize that the BSP is not a miracle worker. Monetary policy works best only on the demand side, something that perks up when money supply is excessive or interest rates are just too low. People troop to the banks to borrow — for real estate, for working capital, or even for business expansion.

This does not always happen when times are extraordinarily scary. Today’s pandemic, for instance, locks down mobility and business, causing joblessness and hunger. There is no sense doing business and borrowing from the banks.

Under this serious health situation, the consensus is that fiscal policy should do the heavier lifting. Great mileage can be achieved by correct, priority-driven public spending with supporting role of the central bank in reducing interest rate and managing liquidity. Unfortunately, the budget appears to have favored anti-insurgency initiatives rather than pandemic-related causes; adjustments in the salaries of uniformed personnel rather than of our medical frontliners and teachers. Because much of there sources involved were borrowed, our fiscal response could have arguably worked against us.

The BSP actually did more than what was expected under the situation. Injecting around ₱2.8 trillion in domestic liquidity, the BSP also dropped its policy rate to 2.0 percent. This is lower than the 4.5 percent average inflation for the first nine months of 2021, and the projected inflation of 4.4 percent in 2021, 3.3 percent in 2022 and 3.2 percent in 2023.

We have no basis for comparing the 2.0 percent policy rate with what the Tailor rule, the traditional measure of appropriateness of monetary policy, would say even on broadly indicative terms, both present and future. But one can safely bet it qualifies as generally loose. Our policy rate today is negative in real terms.

Our monetary authorities also extended various forms of regulatory relief that should provide great leeway to both household and corporate borrowers.

But we see problem whenever the BSP assures the public that it would do everything to help in economic bounce back. Nothing patently wrong with that. However, market players consider this a giveaway to sustained monetary accommodation, rather than preempting inflation, because all is well on the inflation front. With emerging risks whether in terms of high oil prices or disruption in global value chains, market influencers could be drawn in the wrong direction.

Based on relevant data sets, and any sort of soundbites from the BSP itself, market analysts do and release their forecasts accordingly. Therefore, these influencers drive overall market expectations. Ironically, the BSP would also consult what they are saying as part of the data sets that guide its future moves.

The echo chamber becomes tainted.

BSP counts itself as part of the “transitory team” because those pressures are deemed short-lived and inflation will return to target as early as next year and 2023. Instead of doing conventional monetary policy, BSP seems to be going the way of “targeted intervention.” Sustaining monetary support is going to be a tricky balancing act. For there is very little “transitory” about the emerging inflationary pressures like one, higher oil prices. While these are expected to remain elevated, very few would have expected oil prices to exceed $80 per barrel. With this recent upturn, the BSP may have to recast its projections for 2022 and 2023.

As an inflation targeting central bank, a future breach of the inflation target warrants BSP’s review of monetary policy.

As The Economist noted, “there is a shortage of energy, rather than an abundance of it.” Investment in oil wells, natural-gas hubs and coal mines has dried up. The pressure to decarbonize is also compelling. OPEC has agreed to keep production levels controlled. Even as the world pivots to greener and cheaper energy sources, it might take more years to be weaned away from fossil fuels.

And two, supply chain disruptions. The IMF recently observed that supply disruptions could be a real challenge to post-pandemic recovery. Freight costs have risen while deliveries have been delayed due to “shutdowns of factories in China, lockdowns in several countries across the world, labor shortages, robust demand for tradeable goods, disruptions to logistics networks and capacity constraints.” These disruptions could reflect either surging demand, or supply constraints, or both. There is huge likelihood that output growth may be set back. This may not at all be transitory because of elevated demand during the holiday season in the world’s biggest economies, another wave of new COVID-19 infections and extreme weather events.

The Philippines may be hit by any of these two real threats to both output and inflation. The worse is when they both hit us. The echo chamber will not be of any help.