BSP hints at ‘calibrated monetary response’ to pesky inflation spike

MANILA, Philippines—The Bangko Sentral ng Pilipinas (BSP) for the first time on Thursday (March 11) dropped hints it may take action against ongoing price spikes with a “calibrated monetary response” if more evidence emerges that inflation, induced by supply issues, is being aggravated by consumers rushing to buy goods in anticipation of higher prices.

At the same time, however, BSP Governor Benjamin Diokno said the agency’s response to the ongoing inflation spike, mainly by refraining from raising interest rates, was a “prudent approach” which would help the domestic economy recover from a slump in 2020.

At an online briefing, the central bank chief said the regulator is closely watching for the emergence of so-called second round effects from pork shortage and rising fuel prices, which could warrant an interest rate hike.

“While central banks tend to look past the initial first round effects of supply shocks, their prevalence as a cause of inflation remains an issue of considerable importance, particularly in emerging economies,” Diokno said.

“For this reason, the BSP observes the market for second-round effects from supply shocks, as well as signs that public inflation expectations may be moving away from the government inflation target, both of which may require a calibrated monetary response,” he said.

“The BSP is closely watching the data and remains attentive to risks to future inflation and inflation expectations in order to determine the appropriate policy course,” he added.

The inflation rate rose to a two-year high of 4.7 percent last February due to the lingering effects of the African swine fever outbreak that has all but decimated the hog industry in Luzon, forcing the market to rely in supply from Visayas and Mindanao, as well as from foreign sources.

The situation is also being aggravated by rising international petroleum prices as the world economy continued to recover from the effects of the COVID-19 pandemic.

During the briefing, Diokno reiterated that rising prices are being caused by problems in the supply of basic goods, explaining that food and fuel make up 38 percent of the country’s inflation rate computation.

“Like most central banks, the BSP recognizes that not all increases in inflation are the same,” he said.

“Inflation targeting central banks like the BSP seek to respond mainly to demand-driven increases in inflation rather than to short-term price fluctuations, which are usually caused by commodity specific supply disruptions,” according to Diokno

He pointed to past experience showing that non-monetary intervention by the government is more appropriate in directly and immediately curbing higher prices of specific commodities caused by supply-side disruptions like typhoons and disease outbreaks.

Monetary action, which is the central bank’s domain, largely works by broadly dampening domestic demand after a few months’ lag.

“Accordingly, the BSP has continually reiterated its support for the urgent and coordinated efforts by government agencies to intervene and help ensure adequate domestic food supply to mitigate the impact on inflation,” Diokno said.

He said he expected consumer price index to return to normal by the second half of 2021 and result in a 4 percent average for the entire year, which is the top end of government’s 2 to 4 percent projection.

TSB