OF SUBSTANCE AND SPIRIT

It’s quite easy to understand for inflation watchers to consider a possible pause  in the current monetary policy tightening cycle beginning this May. The Bangko Sentral ng Pilipinas (BSP) has time and again indicated it is open to such a possibility should inflation continue to trend down and the Philippine peso sustain relative stability. While we see initial signs of those conditions, we should be more careful before we suggest to the monetary authority such policy option. A pause could signify going easy against inflation. With inflation still stubbornly high, inflation expectations may likely be upset. This may turn out to be a tougher nut to crack. True, April’s inflation at 6.6 percent represents some retreat from its peak of 8.7 percent in January. Thanks to lower prices of food and utilities, we should be seeing lower inflation forecasts by the BSP when the Monetary Board meets later this month. This should not amaze us because normally, the latest reading of inflation weighs heavily on the future path of inflation. But the challenge remains that the April 2023 inflation print is still 35 percent higher than a year-ago of 4.9 percent. Neither could we be comfortable with year-to-date inflation of 7.9 percent. Most of all, a pause in monetary policy is risky because core inflation, stripped of the more volatile items like some selected food and energy items, barely moved from 8 percent in March to 7.9 percent this April. Year-ago core inflation was only 2.5 percent, or less than a third. While core inflation is more difficult to appreciate, many central banks focus on it in formulating monetary policy. Such metric of price stability is not tarnished by short-term volatilities like the failure to promptly im-port food commodities following a sudden food shortage. One can even argue that it’s the better indicator of longer inflation trend on which monetary policy should be anchored. But given the preponderance of food and energy in the consumer basket in emerging markets like the Philip-pines, headline inflation remains suitable for price monitoring. For central banks to be more balanced in their policy decision, it would also be useful to drill down into core inflation. It gives an additional tool to assess both the direction and magnitude of monetary policy. In the case of the US Fed, Nobel laureate Paul Krugman last month proposed that it should not raise interest rates anymore because it’s “overestimating the inflation threat by relying on narrow, lagging measures that don’t reflect the current economic reality.” The US Fed, Krugman observed, is fixated on flawed price pressure namely, personal consumption expenditure index (PCEI). This has been slowing down quite slowly with some considerable lag unlike the usual consumer price index (CPI) which showed a whole percentage point decline from 6 percent to 5 percent in March. Krugman seemed to have ignored the fact that the actual and projected inflation rates still exceed the inflation target of 2 percent even as its real GDP growth is expected to have slowed down significantly in the first quarter 2023. But given its mandate to promote price stability, full employment and moderate long-term inter-est rates, Krugman may have some point. The BSP has a different mandate. It is promoting price and financial stability conducive to sustainable economic growth. And like the US, our actual inflation rate for the first four months of 2023 is double the high-end of the inflation target of 2-4 percent while the forecast of 6 percent is a full two percentage points above. A pause might be interpreted as tolerance. But the impact of tight monetary policy to address real sector effects in the Philippines remains relatively manageable. Economic growth proved resilient by averaging over 7.4 percent for the last three quarters of 2022. While market analysts project the first quarter 2023 GDP to have slowed down, the median forecast is a respect-able 6 percent. This could be traced to high inflation and high interest rates, both of which may have dampened consumption. A pause to minimize real sector effects is hardly justified. In fact, a couple of indicators show favorable future trends. Quarter one business expectations survey recorded a sharp gain in optimistic sentiment from 23.9 percent to 34 percent. Consumer expectations survey for the same period showed less pessimistic result since the pandemic except during quarter two of 2022. But jobs growth averaged around 95 percent for the whole of 2022 and over 95 percent for the first three months of 2023. Thus, both unemployment and underemployment have relatively stabilized at levels lower than their peaks during the pandemic, and last year’s labor market performance. We don’t think financial stability has been compromised. Banks continue to lend. In March, bank lending activities continued to recover, growing by some 10 percent with loans to deposit ratio above 70 percent. Non-performing loans remain low. It is correct for the BSP to also sustain the call for non-monetary measures by the departments of agriculture as well as trade and industry. Upside risks continue to be dominant including El Niño’s impact on agriculture. Mobility could be constrained again by a resurgence of the pandemic although its deathly implications might be less. Another big risk which should warrant more careful monitoring is national government (NG) debt which hit another high of ₱13.86 trillion by end-March 2023. Given the resiliency of the real sector, NG has the option to gun for fiscal sustainability instead of pursuing more aggressive public spending. Fiscal deficit could be cur-tailed and borrowings trimmed. Interest rates do not have to rise much. Not allowing one’s left hand to know what the right hand did is an excellent  reminder for philanthropists, but a bad policy approach. When we see a general resiliency of the real and banking sectors to spirited monetary policy, the least we should have is a fiscal policy that complicates, rather than supports, the crusade against inflation.