With hands tied for further rate hikes, BSP may have one card left
The central bank may have to let the local currency appreciate further against the US dollar in a bid to mitigate a recent inflation uptick caused by higher food and fuel prices since it wants to keep interest rates low for the meantime to encourage economic growth.
Thus said an economist over the weekend, who noted the latest upward pressure on the consumer price index was significantly different from the country’s last inflationary period in 2018 when the economy was still growing above 6 percent. “With BSP (Bangko Sentral ng Pilipinas) not likely open to hiking rates this time around as it would derail what little growth momentum left in the economy, perhaps if ever [the central bank] would be forced into action, allowing the currency to appreciate would be their only play available,” ING Bank Manila senior economist Nicholas Mapa said.
The peso currently stands at 48.08 against the dollar, and market watchers polled last month by Bloomberg News expect the local currency to appreciate to an average of P47.50 in 2021 due to continued weakness in imports.
“Since BSP will likely continue to keep its eye fixed on the growth objective given the dire needs of the economy and ruling out early rate hikes in 2021, perhaps the only card they can play to combat inflation [this year] would be to let the currency appreciate,” Mapa said.
The central bank said the latest uptick in inflation, which showed the latest consumer price index rise to 3.5 percent, was “transitory” to supply side disruptions caused by recent typhoons and the ongoing African swine fever outbreak, as well as higher input costs such as global oil prices.
The ING economist said the recent anxiety over the recent pickup in prices evoked memories of the most recent inflation breach in 2018. That year, despite evidence of price pressures, monetary authorities decided to reduce reserve requirements to the surprise of market participants.
“What followed was a quick acceleration in inflation and an eventual breach of target even after an aggressive gross domestic product momentum-killing string of rate hikes,” he said. INQ
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