BSP not worried about stagflation

The Bangko Sentral ng Pilipinas (BSP) on Thursday, June 16, said stagflation where there is high inflation and unemployment but slow growth, is not “an immediate risk” to the domestic economy.

The BSP said the economy is fundamentally strong to sustain its growth after reporting a higher-than-expected 8.3 percent GDP expansion in the first quarter this year. The GDP outlook is also on track to achieve the government’s seven to eight percent growth target for 2022.

BSP Governor Benjamin E. Diokno

“The steady upturn in credit activity, ample domestic liquidity, and favorable market sentiment should also help boost economic activity,” said BSP. It cited the country’s steady foreign direct investment inflows and the latest consumer confidence survey which improved in the first quarter.

The BSP said domestic labor conditions are improving with employment “now approaching pre-pandemic levels following the easing of Covid-related mobility restrictions and sustained vaccination efforts.” From a peak of 17.6 percent during the height of the pandemic in April 2020, the unemployment rate has fallen to 5.7 percent by April of this year.

Inflation, meantime, continue to increase. In May, inflation rate hit 5.4 percent from 4.9 percent in April. The BSP as of its May 19 monetary policy meeting has set 4.6 percent as inflation forecast for 2022 and 3.9 percent for 2023. The government target is two percent to four percent.

“While domestic inflation is seen to remain elevated in the near term, as a result of supply-side factors linked to volatile global commodity prices, inflation is expected to revert to the government's target range of two to four percent by 2023,” said BSP. The balance of risks to the inflation outlook still on the upside for both 2022 and 2023.

The BSP said it “reiterates its support for urgent and coordinated efforts of government agencies to ensure adequate domestic food supply. Direct and targeted interventions made by the national government will be critical in tempering the impact of persistent supply-side pressures on prices and wage-setting.”

The BSP also said that it will continue to be vigilant “over emerging price and output conditions and will undertake necessary action to ensure that monetary policy settings remain appropriately calibrated, consistent with the BSP's price and financial stability mandates.”

The Monetary Board will meet next week, June 23, for its next policy stance meeting. Outgoing BSP Governor Benjamin E. Diokno and Monetary Board member Felipe M. Medalla who is the next BSP chief, has both signalled another rate hike of 25 basis points (bps) next week.

Last month, Diokno expressed confidence that there will be no recession for the Philippines. He is bound for the Department of Finance as its next secretary under a Marcos government on July 1.

He was asked earlier about US recession warnings and its spillover effects to other countries including the Philippines. Diokno said the country had been growing at around six to seven percent before the pandemic while the economy has recovered after a slowdown and contraction in 2020 when it bounced back to 5.7 percent in 2021.

Meantime, global investors are increasingly worried about a US recession this year or in 2023 with a slowing US economy resulting to stagflation due to higher prices of food, oil, energy and other non-oil products.

The US Federal Reserve on Wednesday raised its key rate by 75 bps. Analysts now expect the BSP will raise the rate by 50 bps next week, from an earlier projection of 25 bps.

The BSP’s Monetary Board already increased its policy rate by 25 bps last May 19, after freezing it at two percent since November 2020.