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On monetary policy: Some known unknowns

This broadsheet reported last Monday that the “Bangko Sentral ng Pilipinas (BSP) was widely expected to maintain the key benchmark interest rate at 6.25% on Thursday, amid easing inflation and slowing economic growth.” By the time this column comes out today, the BSP would have already affirmed who among the 18 analysts had the better read of BSP monetary policy.

With BSP forecasting inflation for 2023 and 2024 at 6.0% and 2.9%, respectively, many of our friends subscribe to the idea that the three-month easing of headline inflation from its peak of 8.7% in January should signal for a pause. This is a crucial point. With economic growth losing some momentum in the first quarter 2023, a pause might be preparatory to a possible reduction in the policy rate now at 6.25%. 

True, real policy rate is now positive with a 6.0% forecast for 2024 but the margin is too slim at 25 basis points, and should the US Fed opt for another rise, it’s the peso that would have to roll with the punches with ultimate hit on inflation itself. Those talks about our exports getting more competitive with a weaker peso may need to be recast because market share and product quality are more critical.

Strict inflation targeting would be tempted to prefer immediately scaling down the policy rate but the monetary authorities are more flexible in considering several other drivers of price dynamics before finally easing.

It’s correct to focus on the downtrend in headline inflation as one metric of the direction of interest rate policy. But year-to-date inflation averages an uncomfortable 7.9% against the target of 2-4%. Core inflation, stripped of the more volatile food and energy components, remains pretty stubborn as it barely moved from 8.0% in March to 7.9% in April, with a year-to-date average of 7.8%. This is the focus of monetary policy, that which captures the summation of demand conditions.

It’s sad to see real GDP coming down from its peak of 12.0% in the second quarter 2021 but there should be no love lost. The intent of monetary policy has always been to keep inflation low and stable, and to ensure it is maintained even with some hit on economic growth. That is the primary mandate of the BSP. After all, no one is complaining because at 6.4%, real GDP in the Philippines is one of the highest among emerging and developing countries in Asia. It also outperformed the median forecast of 6.1% among market analysts.

Arguing that a further 25-basis point increase in the BSP policy rate could further upset our growth path negates our claim that the Philippine economy has been resilient in the last two decades. We have managed to build a stronger footing through a series of strategic policy and structural reforms even through the debilitating years of the pandemic.  As a result, we have been seeing total factor productivity rising and economic efficiency improving.

To be sure, they cannot be reversed by an appropriately cautious monetary policy.

What can subvert it is misguided public policy, market loss of confidence, or even an unmitigated inflationary situation that could leave many hungry and kept out of the mainstream of education and other economic opportunities.

Corresponding credit rating downgrades are just formalities.   

This is how we might interpret the news about the preliminary views of the International Monetary Fund (IMF) mission for the Article IV consultation led by our friend Shanaka Jay Peiris. While the mission expects a significant slowdown in the economic expansion of the Philippine economy from the Fund forecast of 6.0% for 2023 to 5.5-6.0% for 2024, its recommendation for sustained tightening is unmistakable. Peiris was quoted saying “Risks to inflation remain on the upside, and a continued tightening bias may be appropriate until inflation falls decisively within the 2-3% target range.”

We cannot afford to lose sight of the Fund’s observation that “the main downside risks to the (growth) outlook continue to be persistently high core inflation, depreciation pressures amid tighter global conditions…”

High core inflation means demand remains strong and some restraint is necessary. At the same time, persistently high inflation also undermines economic activity especially private consumption which accounts for some 70% of total output. Depreciation pressures against the peso would derive from diminishing differential between local and foreign interest rates. Finally, tight global conditions indicate the need for maintaining cautious monetary policy as a matter of insurance.

What then could change the inflation landscape?

There are many unknowns, but at least we know some of them.

We have no doubt the BSP is aware that there has been a series of petitions for wage hikes. Last month, at least eight petitions for jacking up the minimum wage have been filed in four out of 17 regions. These petitions are pending in the tripartite wages and productivity boards of Metro Manila, Calabarzon, Western Visayas and Central Visayas with some asking for P100 peso or about 20% increase.

This month saw more wage hike petitions for more specific sectors. There are at least 58 bills in the lower house and 21 in the Senate urging for higher wages, the sheer number of which shows the strong support from legislators. Wage erosion due to high inflation is the common basis of the petitions in favor of government nurses for 75% adjustment, while the others were for public school teachers. The leaders of both houses of Congress have been reported to have pledged to pass the proposed legislations shortly.

If labor productivity is not at par with the proposed wage adjustment, this could be inflationary.

With El Niño already around, with a promise of higher heat intensity, a significant portion of food items in the consumer basket is bound to show renewed price pressures. This is abetted by sustained expansion in both domestic liquidity or M3 and domestic credits.

Unfortunately, we are seeing again possible delays in mitigation through prompt importation of rice, sugar and other key food commodities. For sugar, although the idea has been approved by the President, shipments are expected to arrive in September.

We agree that the authorities cannot be too careful because local production and sales should not be affected. We are just worried, however, that overthinking could result in actual delays and forced increase in food prices.

Finally, we don’t wish to be disappointed by another power failure in the country’s various airports because that would destroy our tourism business and jobs around it. That could also restrain growth. But power failure is anathema not only to production but also to prices. A more strategic maintenance of our power plants should be done to avoid previous blackouts that hit Luzon several years ago that affected more than a million customers including production plants and factories. Rotating power interruptions is no solution at all if we are to sustain economic growth and keep inflation low and stable.

The President and the Senate are now contemplating of taking back control of the National Grid Corp. of the Philippines (NGCP) “if necessary” as a matter of national security. The Senate is investigating reports that China “has the capability to remotely access the country’s national grid and sabotage it.” Since NGCP is the sole power grid operator, power transmission should be both secured and sustainable.

These are some of the unknowns that we know. Needless to say, the BSP has a much broader and deeper understanding of the inflation dynamics in the Philippines. It is now looking into big data and data analytics to transcend statistical limitations posed by long lags in collecting data on economic activities, and in considering additional indicators of price pressures in real time.

Its continued independence should assure the civil society and the business community that its decision on monetary policy is well anchored. Such independence also cements international confidence in our demonstrated capacity to manage inflation.

As citizens, low and stable inflation is our recompense.


Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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