The Bangko Sentral ng Pilipinas (BSP) is maintaining a manageable outlook for inflation and steady monetary policy for 2022 and 2023, and will continue to rely on government non-monetary interventions particularly in ensuring pork supply to temper price pressures, according to its highest-ranking official.
In a open letter to President Duterte, which BSP normally publishes but not always in recent times, BSP Governor Benjamin E. Diokno assured Malacanang that inflation will return to the two-four percent target range for this year and in 2023, but reiterated the critical non-BSP actions that will make this happen.
“The continued and effective implementation of direct non-monetary interventions and policy reforms to alleviate supply constraints remains crucial in keeping the trajectory of inflation within the target band, particularly as risks to the inflation outlook appear to be slightly on the upside for 2022,” Diokno said in the letter which he signed on Jan. 18.
He said risks to inflation outlook are associated with a prolonged shortage in domestic pork supply and the higher global commodity prices as global demand improves despite supply-chain bottlenecks.
As for the downside risks to inflation outlook, this remains the COVID-19 health crisis and the uncertainty of the Omicron variant that could extend lockdown measures.
“The inflation outlook (is) subject to considerable level of uncertainty given developments relating to the COVID-19 pandemic, which could affect domestic and external economic conditions going forward,” Diokno told Malacanang.
“Nevertheless, we would like to assure the President and the Filipino people that the BSP is closely monitoring developments and challenges brought about by the pandemic to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” he added.
The letter to Duterte, who will leave Malacanang on June 30 this year, also explained the reason why inflation hit above the target at 4.5 percent in 2021 and why the BSP’s Monetary Board decided to keep the two-percent policy rate for the entire year.
Diokno explained that last year, price pressures mainly stemmed from the supply of key food items and from the elevated energy prices.
Food inflation was affected by a confluence of factors that constrained domestic food supply, he added, such as the African Swine Fever which “significantly reduced domestic hog production even well into 2021 (from 2018).”
“The impact of the ASF exacerbated existing regulatory, tariff, and technology constraints in the livestock and feed sector, driving meat inflation toward double-digit rates in 2021. Note that under current regulation and tariffs, Filipino consumers pay two to three times for pork and other meats compared to Thai or Vietnamese consumers,” said Diokno.
Last year, bad weather conditions which damaged crops and hampered fishing operations, also contributed to the higher inflation.
“Meanwhile, energy prices also went up, driven in part by the sharp uptick in international crude oil prices owing to the recovery in global demand amid restrained supply. Consequently, domestic fuel pump prices rose substantially. At the same time, the increase in generation charges resulted in higher electricity rates,” said Diokno.
The rise in inflation was tempered slightly by negative base effects arising from the significant increase in transport service fares inflation due to higher tricycle fares with the implementation of social distancing protocols a year ago, as well as from elevated meat and vegetable inflation in late 2020, he also said.
“The BSP decided to keep monetary policy settings unchanged in 2021 given that inflation pressures were linked mainly to supply-side factors,” said Diokno in the letter.
“In line with best central banking practices, the BSP tends to look through the initial impact of supply shocks because monetary policy has a limited impact on cost-push forces. Instead, the BSP has supported the implementation of non-monetary interventions and reforms to alleviate supply-side constraints. In particular, the BSP supports the livestock and feed sector competitiveness bill now being considered in the Senate,” added Diokno. “Furthermore, the BSP's inflation forecasts indicate a reversion towards the target range in 2022 and 2023, suggesting a manageable inflation outlook. Inflation expectations have also remained firmly anchored to the target band, based on the BSP's surveys of private sector economists and analysts,” he also noted.