‘BSP risks falling behind curve in inflation fight’

The Bangko Sentral ng Pilipinas (BSP) may be on the brink of losing control and credibility in herding inflation within the target range if monetary authorities do not adopt a tighter policy stance within the next three months, as growth in prices heat up globally due to the Russian invasion of Ukraine.

ING Bank’s senior economist in the Philippines Nicholas Mapa, in his latest commentary, expressed concern that the BSP intended to hold off tightening until the second half of 2022 while influential central banks like the US Federal Reserve is expected to again raise its policy rate this May.

The US Fed raised their benchmark interest rate by 25 basis points earlier this month and Mapa said a forecast of another 50 basis points in May was likely to be very much in play.

Assessment update

Following the US Fed’s policy meeting last week, BSP Governor Benjamin Diokno said the BSP does not have to raise its own policy rates just because the Americans did, reiterating that such decisions will depend on the domestic situation.

The Monetary Board is meeting today to update their assessment of the latest developments, which would impact whether the BSP’s overnight borrowing rate would remain at a record low 2 percent.

“Should BSP opt to sit out the first half even as inflation surges past target, we could very well see BSP fall behind the curve again as they did in 2018,” Mapa said.

“By then, with inflation raging and with Filipinos saddled with astronomically high transport costs, BSP will be losing the most important battle of its inflation targeting mandate—the battle to anchor inflation expectations,” he added. Mapa said that should consumers and firms begin to believe that higher-than-desired inflation is likely to prevail, the credibility in the BSP’s inflation-fighting capability will fade and prompt Filipinos to expect this scenario to continue.

“Once this happens, the country may fall into a price spiral with the BSP unable to corral runaway inflation expectations,” Mapa said.

“A delay in any form of tightening to the [second semester] runs the very real risk of BSP losing a grip on inflation expectations and will lead to BSP [falling] behind the curve, a position not easily addressed by a token rate hike or two,” he added.

In another commentary, Fitch Ratings has reduced its growth forecast for global domestic product by 0.7 percentage point to 3.5 percent in 2022.

Fitch said the reduction reflected the drag from higher energy prices but also a faster pace of US interest rate hikes than previously anticipated.

The debt watcher said the outlook for global GDP growth has deteriorated significantly as inflation challenges intensify and Russia’s invasion of Ukraine threatened global energy supplies.

“Global inflation is back with a vengeance after an absence of at least two decades,” Fitch Ratings chief economist Brian Coulton said. “This is starting to feel like an inflation regime change moment.”