OF SUBSTANCE AND SPIRIT

There could not have been a better recasting of what to expect from monetary policy in the next few meetings of the BSP Monetary Board than the recent pronouncement of the new BSP Governor Eli Remolona. Contrary to some quarter’s earlier dissonant statement that policy rates may stay until the end of 2023 and a rate cut by the first quarter of 2024, Remolona admitted that monetary policy tightening remains on the table. What we like about his statement in Canada last Friday to Bloomberg is his emphasis that talking about cutting the key rate is premature. Without doubt, a good economist would not really miss the escalating risks to inflation today. Nobody can dispute El Niño’s pervasive impact on inflation, output and even on the financial markets. No amount of the torrential rains this July seemed enough to elevate the water level in Angat and other dams in Bulacan above the minimum 180 meters. With little water, Metro Manila will suffer and over 25,000 hectares of farmlands in Bulacan and Pampanga will experience sporadic irrigation. We might be looking at lower production of rice and other food commodities, and therefore price pressures could build up in the next few months. The prognosis of both output and inflation must be bad that the country’s bonds have started to slide. Philippine bonds used to be the hottest in Asia, but June and July bond dynamics brought losses to investors. Wage increases as an inflation factor cannot be ruled out either. The decision of the tripartite regional Labor Productivity and Wage Board to approve a P40 a day minimum wage adjustment may be limited to the formal sector and in the National Capital Region (NCR) but inflation is not limited in NCR and therefore one should expect more announcements of wage increases in other areas until they are nearly generalized. We are not also oblivious of Senate President Miguel Zubiri’s bill for a P140 legislated wage hike. For the information of the public, this was already approved in principle in the Senate Committee on Labor, Employment and Human Resources. If the Senate could ram through the Maharlika Investment Fund sine die, nothing prevents the super majority from doing the same with perhaps a more popular bill on wage adjustment of as much as 20 percent. With no corresponding improvement in labor productivity, this proposal could be nothing but inflationary. The BSP governor also correctly pointed out that the BSP is also watching for any “sharp” movement in the Philippine peso if the US Federal Reserve tightens monetary policy. This would require a more cautious response from the BSP. Again, this is in contrast to some wise guys maintaining that the BSP was unlikely to move in lockstep with the US monetary authorities. We should recall that Minneapolis Federal Reserve President Neel Kashkari recently echoed current thinking in Washington that “an extended period of high interest rates and an inverted yield curve could put more stress on banks, but would be necessary if inflation stays stubbornly high.” It would be foolhardy to dismiss the need for tight monetary policybecause we observed a few months of inflation downtrend.The latest and the year-to-date inflation remain very much outside the official target of two to four percent. No wonder, SWS latest surveys confirm that inflation remains the top concern of those polled. Better to err on the side of caution. We don’t know how far some attempts of some legislators could push back inflation. A House bill was filed two weeks ago by Representatives Brian Raymund Yamsuan and LRay Villafuerte to exempt “liquified petroleum gas, instant noodles, potable water in containers and kerosene” from the list of products with surging prices. This means the prices of these commodities could be administered especially during calamities or shortages. Rice, sugar, as well as fresh, dried and canned fish, among others, are included in the list of essential commodities yet their inflation rates registered among the fastest. For his part, Senator Raffy Tulfo criticized the plan of the Department of Finance to tax pre-packaged foods including confectionaries, snacks and desserts on the ground that these products are patronized mostly by the poor. Taxing them will increase their prices. But our health authorities agreed to the proposed measures because of health consideration, that these specific products are junk food and should be discouraged. They could ultimately lead to obesity and diabetes. What also distinguishes Remolona’s recent pronouncements is its obvious grasp of what ought to be done in the context of recent developments. First, he clarified that the BSP remains on the “tightening side.” This is correct because one, we have not achieved our inflation goal and two, risks continue to be on the upside. Second, it was logical for him to pose the question “whether to hike or not to hike” instead of the irrepressible analysts’ perennial question on when the BSP should pause and cut rates. Third, while the economy remains strong, the monetary authorities should examine the impact of the tightening cycle on the durability of economic growth. This is what the BSP intends to do although a slowdown is to be expected as monetary policy does the heavy lifting on fighting inflation. The point about the future path of the domestic currency is very timely because of the possible pass-through effects on inflation. Likewise, inflation expectations should never be ignored especially when people keep talking about the current pause and a future rate cut against a backdrop of sustained inflation of key commodities. “The BSP has all the reasons to describe any talk about a rate cut premature. “The jury is out whether all this constitutes a policy drift, or a simple return to what flexible inflation targeting is all about. But we are encouraged by the BSP’s relinking of the timing of a possible adjustment in the required reserve ratio (RRR) with the monetary policy stance. In the past, RRR were simply reduced even as monetary policy was being tightened because the RRR adjustments were considered operational. “Even central bankers may forget that by their mandate, especially those implementing monetary policy based on flexible inflation targeting, they are “structurally hawkish.”