Inflation remains as sticky as a rice cake. “Its ugly head,” a descriptive term I first heard some 27 years ago during the visit of International Monetary Fund Managing Director Michel Camdessus in the country, will continue to show due to combined effects of external and internal developments.
Just a bit of history here. The seventh IMF Managing Director came to the Philippines in November 1997 to personally look into the structural policy measures of the regional economies devastated by the Asian Financial Crisis, which erupted four months prior and triggered the Bangko Sentral ng Pilipinas to declare de-facto devaluation of the peso on July 11, 1997.
I simply adore his French accent, his be-dimpled face and his cherubic smile. And apart from his “ugly head” description of inflation, he distinctly recalls the late President Fidel V. Ramos calling him “Michael,” which is fully understood because Michel is, almost always, equated to a female gender’s name.
Back to now. Viscous as it is, inflation is the overarching issue that took a better part of last Monday’s Philippine Economic Briefing. Inflation remains the common denominator in the three-program that was compartmentalized into three focused topics.
This key macro-economic indicator is a great equalizer. Its negative effects weigh down on all sectors – the poor, the rich and famous – limiting our spending ability and reducing the quality of our lives.
It’s common knowledge in the business and banking community that the Philippines is not alone in its anguish brought about by inflation with major economies, specifically the US, are likewise hurting.
This brings me back to my question in my previous piece on the significance of the US Federal Reserves monetary policy as a game changer in the decision making of the BSP, an issue that was actually discussed at the IMF-World Bank Spring meeting.
And I finally got the answer from IMF resident representative to the Philippines Ragnar Gudmundsson, saying that this stance “needs to be understood in the context of efforts to tame domestic inflationary pressures.”
“When considering the path of monetary policy and policy interest rate decisions, what we are saying is that the BSP decision should be first and foremost data dependent and driven by domestic price considerations,” he said.
Mr. Ragnar acknowledged that the inflation “trends are encouraging,” but added that the monetary authorities should consider the upside risks to inflation outlook stemming from the geo-political tensions, higher commodity prices internationally and also domestically some demands for higher wages.
He went on saying: “This is why our view is that the BSP should probably maintain a sufficiently restrictive monetary policy stance until we are firmly within the BSP target band.”
It’s been a while since I heard such an IMF “general recommendation.” I was embedded in the banking and finance beat when the country finally graduated from the clutches and tutelage of IMF in May 2003 under the watch of the late BSP Gov. Rafael B. Buenaventura and Finance Secretary Jose Isidro N. Camacho, after completing the 23rd last program arrangement in 2000.
Putting this aside, I subscribe to the IMF recommendation based on the Balance of Payments and Current Account expectations for the year. Yes, Virginia, while we are improving with the CA negative position narrowing, still it’s on a deficit at $11.1 billion or 2.5 percent of gross domestic product, which means we rely more on importation as our export of goods is being dragged down by the economic slowdown of our trading partners.
Then, there’s the interest rate differential factor. As Mr. Ragnar pointed out: “If interest rate differential is reduced this can entice some investors to instead put their money in less risky assets, well established markets with deep liquidity.”
The current 100 basis points interest rate differential (Fed policy rate is at 5.5 percent and BSP at 6.5 percent). Pre-pandemic, it was 400 bps.
On the lighter side, let me share what I’ve heard, saw from my observation deck but not seen during the live streaming. Guess the personalities involved.
1.) This person emerged, from an exit poll, as the best moderator, even better than the host. He knows his craft and is consistently present in all of the PEBs. He’s a favorite. He joins the economic team in Philippine roadshow presentations abroad;
2.) This economic manager must be famished that he deserted his front table for another table at the back to devour with gusto the snacks catered by Via Mare while answering questions from a journo;
3.) This participant mistook Mr. Ragnar as the resident representative of the World Bank, the IMF’s Bretton Wood sister?
There were more unseen snippets but I will share in the next piece.
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