MANILA, Philippines—There is scant evidence that rising prices currently hammering the Philippine economy is causing a chain reaction of inflation to warrant raising interest rates, the head of the Philippine central bank said.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the key to reining in inflation remained to be “non monetary government measures to augment the domestic supply of key food items.”
“The domestic prices of key agricultural commodities such as fruits, fish, and pork as recorded in the consumer price index data have declined in recent months,” he said at an online briefing. “With continued implementation of non-monetary supply-side measures, the BSP expects ongoing price pressures to dissipate further in the coming months.”
The BSP chief—who has, in recent months, been resisting calls for more aggressive action against “supply side inflation: — said the recent price increases have been traced mainly to higher prices of a limited number of items owing to pressures that are “transitory” in nature.
He said these supply shocks included the impact of adverse weather conditions on prices of some agricultural food items, the rise in imported crude oil prices, and the ongoing African swine fever outbreak in the country.
“Responding to higher inflation requires a clear understanding of the reasons behind inflationary pressures,” Diokno said. “Demand-driven inflation often requires a firmer monetary policy response. On the other hand, higher inflation caused by rising producer costs or supply-side constraints requires direct non-monetary interventions that help ease those supply constraints.”
He explained that, consistent with its role as an inflation targeting central bank, the BSP accommodates the initial impact of supply-side shocks as these typically prove to be short-lived in nature. At the same time, direct non-monetary policy interventions by the national government serve as a more appropriate and targeted means of addressing supply-driven inflation.
The BSP chief maintained that the agency can keep interest rates at current historic lows to support economic recovery since it believes inflation will eventually decelerate to the midpoint of the government’s 2 to 4 percent target in 2022 and 2023.
“Our manageable inflation outlook provides us with ample room to keep the monetary policy stance sufficiently accommodative to support the ongoing economic recovery,” Diokno said. “Inflation expectations continue to be broadly anchored over the policy horizon, with the above-target mean inflation forecast from analysts for 2021 giving way to lower expected inflation in the following year.”
Despite this, he said the BSP continues to be vigilant in monitoring the evolution of price conditions and stands ready to respond to signs of potential second-round effects from supply-side inflation pressures.