Supply side inflation calls for supply side solutions, says Diokno

pressures are coming from supply shortages, especially from the pork industry which has been affected by the African swine fever (ASF) virus.

This was according to the central bank’s head who, on Thursday, said the regulator was ready to tighten monetary policy if it would detect so-called second round effects from the ongoing uptrend in the consumer price index.

At an online press briefing, Bangko Sentral ng Pilipinas (BSP) Governor Bejamin Diokno said the agency had so far released “nearly P2 trillion” in liquidity into the local financial system to counter the economic malaise caused by the coronavirus pandemic.

Record amount

This record amount of liquidity has neither caused the current spike in the inflation rate nor destabilized the financial system, he said, adding that the BSP had so far carefully preserved a balance between providing noninflationary monetary policy support to the economy and ensuring the continued soundness of the banking system.

“At this juncture, the BSP believes that we are not experiencing a trade-off between accommodative monetary policy and financial stability,” he said.

“This is based on three factors,” Diokno explained. “First, the uptick in inflation in January 2021 is attributed primarily to transitory supply side pressures. Second, BSP measures are aimed at ensuring economic recovery and limiting the pandemic’s potential scarring effects in the long run. Third, there is no evidence of increased risk-taking by financial institutions at this time.”

Uptrend ‘transitionary’

He noted that the current inflation environment, although elevated, continued to allow the BSP to maintain its accommodative monetary policy stance.

Central bank planners see the recent inflation uptrend as largely “transitionary,” reflecting the impact of base effects, weather-related disturbances and the ASF outbreak on a narrow range of food items, as well as higher global oil prices.

With demand pressures remaining largely subdued, and with inflation expectations holding firm within the 2 to 4 percent target band, the BSP has scope to maintain monetary policy support to the economy to strengthen overall demand and shore up market confidence, Diokno noted.

Prudent banks

At the same time, with ample liquidity in the financial system, the BSP observes that banks have remained prudent, as concerns over asset quality, profitability, and the broader economic outlook have resulted in tighter credit standards.

Given the continuing monetary and fiscal policy interventions, however, the BSP expects credit activity to gradually improve in the coming months, especially as the mass vaccination program in the country gets under way.

In the meantime, regulatory relief measures remain in place should financial institutions need recourse from adverse conditions, even as the BSP continues to be on the lookout for potential threats to the overall health of the financial system.

“The BSP shall remain vigilant to help ensure that its policy responses will neither lead to excessive inflation nor result in threats to financial stability,” Diokno said.