The Bangko Sentral ng Pilipinas (BSP) has an ongoing review of its inflation forecasting methods after taking unprecedented policy actions as pandemic responses, such as providing liquidity to fund credit and foreign exchange interventions.
The BSP’s exit strategy from its pandemic-related measures will also require extra vigilance in monitoring its impact on inflation, said BSP Deputy Governor Francisco G. Dakila Jr.
“Because of the effects of the pandemic and the Russia-Ukraine war on the global supply chains, economies—big and small; advanced or emerging or frontier—must face an environment of high inflation. As inflation pressures are expected to be central to the issues that central banks face, revisiting and learning various methods of estimating core inflation would be helpful when balancing stabilization mandates,” according to Dakila during the BSP-sponsored International Research Fair. The two-day event was concluded on Wednesday, July 13.
The BSP’s research fair tackled the following: spillovers and systemic risk; core inflation measurement; and inclusive growth and finance. “All are relevant to central banks dealing with the effects of the pandemic and facing headwinds affecting supply conditions as well as risk sentiments,” said Dakila.
Dakila said on top of the pandemic’s burden on a still recovering economy, the Ukraine war threw another monkey wrench in the way the BSP measures inflation expectations.
“Additional growth and inflation headwinds brought on by the Russia- Ukraine war and the US monetary policy’s influence on emerging markets, like the Philippines, need to be considered. At the same time, with its real estate sector credit situation and outlook, China cannot be an engine of growth this time unlike in past crises,” he said.
Still, Dakila is confident that the BSP and other central banks around the world have learned from past crises, and must continue to finetune and enhance its forecasting methods.
“We will come out at the other side, if not stronger, at least wiser,” he said, despite that the pandemic “is like no other any of us have experienced” which is akin to a natural disaster.
As such, it required a set of policy responses that needed to be “swift, substantial, and novel from monetary and fiscal authorities,” said Dakila.
Since last year, the BSP has noted changes in the labor market for example, and its impact on inflation. It has reviewed the evolving wage dynamics and its ability to influence the rate of increase of prices. A wage increase is a demand-driven price pressure.
The BSP’s inflation targeting framework has the flexibility to support employment and output growth objectives, while giving priority to the inflation mandate, particularly when the inflation outlook is manageable and the government inflation target is not at risk.
The BSP has long-standing focus on its inflation mandate which allows monetary policy to support growth and employment over the long run by reducing inflation variability and economic uncertainty.
As of end-June, the country’s average inflation is at 4.4 percent. The BSP’s average inflation forecast for this year is five percent and 4.2 percent in 2023, both years still above the target of two percent to four percent.
In June, inflation hit 6.1 percent from 5.4 percent in May, and the Philippine Statistics Authority said this is not yet the peak for 2022, given that prices of food and other commodity groups are still rising, especially with the transport fare hikes last month.
BSP Governor Felipe M. Medalla said last week the the BSP is ready to take further policy actions, if needed, and that tt will also continue to support and advocate for non-monetary actions by other government agencies to contain any further inflationary pressures that may spill over to 2023.
The increase in the US interest rates of 75 basis points (bps) last June 16 is complicating BSP’s targeting abilities, however. On June 23, the BSP mirrored the rate hike, but only by 25 bps, bringing the current policy rate to 2.5 percent.
The BSP’s next policy meeting which was Aug. 18, is expected to see a more aggressive rate increase of as much as 50 bps to three percent to control high inflation.
Medalla said earlier that the large US policy rate hikes was causing nearly all currencies to significantly depreciate against the US dollar, including the peso.
He also said that the ongoing policy normalization, which could result in tighter global financial conditions, increased financial market volatility, and capital flow rebalancing across the globe, will heighten volatility in the country’s foreign exchange rates and capital markets.