Supply side interventions, not BSP action, key to slaying high PH inflation

The country’s rising inflation rate will normalize once policymakers address supply bottlenecks that have pushed the consumer price index to its highest level in two years, according to economists and market watchers.

Pending more meaningful moves to increase the supply of certain food items in the local market, however—in particular, pork which has been affected by an outbreak of African swine fever—prices of basic goods and services will continue to accelerate beyond the government’s target range.

Thus said ING Bank Manila senior economist Nicholas Mapa, who explained that financial markets had factored in the reality of higher inflation for most of 2021 and had adjusted their expectations accordingly, easing pressure on the central bank for an immediate response.

“Looking at the similarities and the differences [between the current and previous bouts of high prices], we may be more comfortable in the notion that inflation will not likely run away as badly as it did back in 2018,” Mapa said in a note to the press.

“Market players appear more ready to accept higher levels of inflation for the meantime and this will challenge BSP’s (Bangko Sentral ng Pilipinas) ability to hold inflation expectations a bit better,” he added.

The economist said the relatively strong peso and the prevailing low interest rate regime around the world were also playing in favor of the central bank’s current policy of “benign neglect”.

BSP Governor Benjamin Diokno recently said monetary planners were pausing further action against the spike in inflation rates—addressed by raising interest rates and draining the markets of liquidity—because the current episode being experienced by the country was caused by supply side factors that could not be addressed by central bank action. INQ