The Bangko Sentral ng Pilipinas (BSP) remains watchful and is closely monitoring possible risks to the inflation outlook but sees no clearer signs of second-round effects despite persistent talks of transport and wage hikes amid higher oil and food prices.
BSP Governor Benjamin E. Diokno in a press chat on Thursday, March 17, said that since inflation is projected to move close to the upper-end of the government’s two-percent to four-percent target band in the next three years, they are extra careful of catching potential upside risks to the outlook, particularly higher global food prices, shortage in domestic pork supply, as well as higher fish prices.
Diokno also reiterated his previous comments that the Monetary Board which he chairs, will not necessarily have to take actions following the US Federal Reserve’s rate hike, its first since 2018. The US Fed approved an initial 0.25 percentage point rate increase to protect its inflation and growth outlook.
Diokno has been saying since 2020 that the BSP will not mirror US rate hikes, and that future monetary policy decisions remain data-driven and anchored on evolving domestic developments to avoid “unintended consequences associated with protracted easing monetary conditions.”
“We do not necessarily have to move in pace with the monetary policy adjustments of the US Fed. We will review our inflation outlook and policy stance in our upcoming monetary policy meeting (next week) March 24. I would like to reiterate that the BSP calibrates its monetary policy settings in response to external developments only to the extent that they influence the outlook on growth and inflation,” said Diokno.
The BSP chief also reiterated that they employ various tools such as a flexible exchange rate system, external buffers, macroprudential policy framework and liquidity-enhancing tools to “deal with any short-term volatility that may arise from risk factors related to potential tightening of financial conditions.”
Meantime, the BSP may not be that much worried about emerging second-round effects to inflation, but they continue to note the government’s ongoing measures to address supply-side shocks through non-monetary policy interventions.
These are government’s targeted measures to augment pork supply and to help stabilize pork prices such as the temporary reduction in tariffs and allowing more imports for pork.
“We have observed more discussions right now regarding transport fare petitions, there are also some discussions on wage adjustments and that is expected given the increase in oil prices as well as domestic pump fuel prices. However there is no fare hike adjustment that has been granted and there are discussions on weather there is room for wage adjustments at this time,” said BSP Managing Director Zeno R. Abenoja.
Abenoja, in the same press chat, said that it is important that the government will continue to pursue “firm measures to temper the negative impact of the increasing oil prices.”
“There is a move to open up more sectors or alleviate the restrictions related to the pandemic, that will open up the economy, provide more opportunities for economic activity to prosper or to continue even with oil price increase in the international market,” he said.
Abenoja also pointed out that there are measures to address the impact of higher gas and diesel prices, the targeted subsidies to the agricultural sector, to the public transport sector and the fisheries that should also help alleviate pressures on petitions for fare hike adjustments.
“There’s also a host of measures to help temper any price increases in food prices including on agricultural products like rice, corn, fish, meat, chicken, sugar, and cereal-related commodities. All of these measures we think are very important in trying to address possible second round effects,” he added.
Abenoja said that at the end of the day the BSP will “continue to observe what will happen to inflation expectations and discussions on possible second round effects.”
The BSP noted recent data on the average retail prices of agricultural commodities which showed generally steady trends, particularly for rice, corn, and chicken.
“While we observed few occasions of upticks emanating from supply constraints and rising producer costs, we note that the impact of supply disruptions brought about by natural calamities were short-lived and were mitigated by government measures, such as early harvest of crops and close price monitoring conducted by concerned agencies,” said Diokno.
Diokno cites the implementation of Executive Order Nos. 133 and 134 or the reduced tariff on pork imports which helped temper pork prices.
The BSP does not typically react immediately to supply-side inflationary pressures as these are mostly transitory. These supply-driven price pressures on basic commodities are usually best addressed by non-monetary policy interventions of the government.
The Monetary Board, BSP’s policy-making body, has kept a low benchmark rate at two percent since November 2020. The market consensus is that BSP may raise the policy rate by at least 25 basis points (bps) this year and a bigger 50 bps rate hike in 2023.
Diokno has said that inflation will again break the two-four percent target if global crude prices which has risen past $100 per barrel on account of the Russia-Ukraine war, will stay above $95 per barrel on a sustained basis.
As of February, the country’s inflation is at three percent. The BSP has a current inflation forecast of 3.7 percent for 2022 and 3.3 percent for 2023, but these will be revised on March 24, when the Monetary Board will hold its next monetary policy meeting.