Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said the inflation-targeting BSP will determine exactly how large of an impact rice prices have on inflation expectations and second-round effects amid an ongoing intense El Niño weather watch.

In a press briefing Wednesday, March 20, Remolona expressed the BSP’s vigilance when it comes to monitoring rice prices as one of the supply shocks to inflation.

“Domestically, the price of rice has a very large effect. So we’re finding that out (just how much). There’s more work to be done. But this is promising research that will help us in monetary policy,” he said. On the global side, it is still oil shocks that have a very strong and persistent second-round effects.

Remolona reiterated the importance of beefing up and enhancing BSP’s research and data resources as they improve the way they conduct monetary policy transmission and containing the inflation environment.

On the impact of El Niño on price prices, the BSP chief said they consider rice prices as “salient prices”.

“They have a disproportionate impact on expectations beyond their weight in the CPI (consumer price index). Because of that, we have to monitor rice prices – mainly rice prices since there are other commodities affected by El Niño. We have monitor their effect on expectations. The second round effects (from rice prices) will affect our monetary policy,” he said.

In terms of inflation expectations, Remolona said the BSP is also conducting more research to determine at some point how it could be disanchored against the inflation path.

He said they have to have an effective way to measure the degree to which inflation expectations are anchored and when they start to de-anchor.

“When inflation expectations become de-anchored, our life becomes much more difficult. We have to be much more hawkish than before as expectations become de-anchored. So we have to be able to measure that, the tendency for that,” he added.

Remolona told reporters that more research will also be done on banks’ reserve requirements and how BSP will regulate this moving on.

In the past, reserve requirements are viewed as a policy to control money supply. “That thinking has gone away. Now, reserve requirements are seen as a distortion on financial intermediation,” said the BSP chief.

“They drive a wedge between deposit rates and lending rates. We’ve lowered reserve requirements quite a bit and they should be lowered some more. But we need good research on the impact of reserve requirements on financial intermediation,” Remolona stressed.

Financial intermediation for now is burdened by regulation including reserve requirements to the point that a lot of lending and borrowing happens outside of the perimeter of regulation, he added. “There’s a gray market for conglomerates (that) lend to each other. We want to bring that back to the formal banking system. That needs more research too, to deepen the capital markets,” he said.

Currently, the banking system’s reserve requirement ratio for big banks is 9.5 percent, one of the highest in the region. Reducing the ratio effectively lowers the costs to banks for maintaining reserves, and at the same time, increasing funds for lending.

Based on the February 2024 Monetary Policy Report, the BSP has already noted that rice price shocks have more persistent impact to supply-side pressures and second-round effects compared to oil.

However, in the same BSP review, oil price shocks have a direct effect on the market’s inflation expectations which is crucial in how BSP decides its monetary policy stance. Second-round or second-order effects are also called indirect effects.