OF SUBSTANCE AND SPIRIT
Diwa C. Guinigundo
By this afternoon, we expect the Bangko Sentral ng Pilipinas (BSP) to announce that it’s keeping its monetary policy stance of accommodating growth and looking through what it believes to be a temporary rise in inflation.
This outcome is a foregone conclusion. While market economists believe that oil and commodity prices could exceed the assumptions behind the 3.7 percent and 3.3 percent inflation forecasts for 2022 and 2023, respectively, BSP’s preoccupation with economic growth would be the biggest obstacle to policy adjustment.
There are good reasons to abandon the idea that monetary policy could still make a big difference in achieving economic recovery.
The Philippine economy appears to be doing well. This broadsheet reported Economic Planning Secretary Karl Chua assuring the public that the economy has remained resilient despite the Ukraine-Russia war. It is expected to bounce back to pre-pandemic levels this year: “We believe we have a very strong domestic economy that can withstand that…”
This bullishness is anchored on a massive vaccine rollout and downgrading of the health alert level of the NCR, and probably the whole country later this year.
The risks posed by the Ukraine-Russia conflict could only trim growth by just less than a percentage point. S&P, for instance, continues to forecast 7 percent in 2022 and 6.7 percent in 2023 in terms of GDP growth despite the cut. It is likely that the Philippines will continue to be one of the fastest-growing economies this year.
Yes, it is correct for BSP Governor Ben Diokno to clarify that the monetary authorities do not have to move in tandem with the US Federal Reserve. We have different real and financial cycles that have to be factored into the calculus of monetary policy. But with globalization and open markets, spillovers and contagion risks have made the world smaller and extremely similar in terms of the challenges to the economies.
For its part, the US Fed, faced with a 40-year high inflation rate, robust economic growth and a tight labor market, recently decided to adjust its key rates by a quarter of a percentage point with a promise of more significant adjustments. These pre-announced moves aim to ensure that the strong economic growth is sustained longer and avoid overheating the goods market through runaway inflation and the labor market through wage hikes.
We might find ourselves in a similar situation of high growth and high inflation but only for a limited period. Unless the BSP makes an early preemptive move, it may not be impossible to see high inflation emasculating economic growth.
For instance, Oxford Economics argued that the downside risks of increasing commodity prices due to Eastern Europe hostilities are strongest in India and the Philippines because they are net importers. With their underperforming currencies, Asia will not exactly be insulated because of increasing commodity prices and lower foreign demand. On this basis, Oxford Economics downgraded Asian countries and raised their inflation outlook.
But the normalization of monetary policy in the Philippines has effectively begun. The BSP has been forced by circumstances to do what is more appropriate with the exception of moving its policy rate.
First, because inflationary expectations are not exactly favorable, the stock and the foreign exchange (FX) markets are down. To help stem the tide, the BSP sold some $2.5 billion in the first two months of 2022. This broadsheet reported last March 15 that “by selling over $2.5 billion in the spot market, the BSP actually siphoned off some P130 billion, an additional mopping up operation to complement the BSP’s other open market operations…”
Second, the BSP loans to the National Government (NG) at the peak of the pandemic were also reduced from P540 billion to P300 billion, or by P140 billion. These accommodations are expansionary because they cause additional money to be released through public spending. Reducing loans from BSP tightens domestic liquidity.
Third, the BSP continues to absorb excess liquidity as a result of its previous cuts in policy rate, required reserve ratio and purchases of government securities in 2020-2021. As of January, BSP’s February 2022 Monetary Policy Report documents that out of aggregate release of P2.2 trillion in additional liquidity, P2.1 trillion was siphoned off. In short, credit and monetary conditions do not seem to need additional support.
The same report shows that total liquidity (M3) has been trending down although M3 to GDP ratio must have been on the rise with M3 growth overtaking output growth. This means domestic liquidity continues to exceed what the economy requires. Open market operations would also need more time to achieve a good liquidity level that is neither tolerant of inflation nor restrictive of growth.
The BSP could be more transparent with the market. It has been correctly normalizing the other aspects of monetary policy. But without formalizing this to the market, the BSP is forfeiting its ability to influence inflation expectations. By reiterating its patience before adjusting its policy rate, the BSP may be affirming to the market that inflation control is secondary, something that departs from its constitutional and statutory mandate.