Wage hikes push BSP closer to policy tightening

The Bangko Sentral ng Pilipinas (BSP) appears to be holding on to its dovish feathers even as the regulator acknowledges narrowing space for an accommodative policy stance amid growing pressure on inflation as well as the beginnings of second-round effects on prices.

BSP Governor Benjamin Diokno on Wednesday noted that headline inflation, after having breached the target band of 2 percent to 4 percent in April at 4.9 percent year-on-year, is expected to remain higher than desired.

At the same time, Diokno said that along with the higher-than-expected 8.3-percent growth rate of Philippine gross domestic product in the first quarter, second-round effects—particularly wage hikes—were starting to manifest themselves.

“The recent approval of minimum wage hikes [in Metro Manila and Western Visayas] leaves the door open for other approvals pending since 2020,” the BSP chief said.

There are pending petitions for wage hikes at other regional wage boards. Petitions for fare hikes are also awaiting action at the Land Transportation and Franchising Regulatory Board.

“These developments strengthen the case for a withdrawal of monetary accommodation as inflationary pressures are likely to persist and disanchor inflation expectations,” Diokno said, meaning that quickening inflation could also nudge expectations beyond the government’s target range.

Still, the BSP Governor noted that the above-target rate observed in April was linked to issues in the supply side instead of rising consumption.

For instance, the impact of the Russia-Ukraine conflict on the Philippines, albeit indirect, is felt through the hampered flow of commodities and higher prices.

Considering this, the BSP continues to believe that the best option to address rising inflation was direct nonmonetary measures to be undertaken by the national government.

Such fiscal policy measures include—as has been recommended by economic managers—increasing the fuel subsidy program; reducing tariff rates for rice, corn, swine and coal until end of the year; and providing targeted fertilizer vouchers to farmers, among others.

Still, Diokno said that “any adjustments in monetary policy stance will be done in a timely manner so as not to disrupt economic recovery momentum.”

The Monetary Board (MB) meets today for this year’s third policy meeting. The BSP’s overnight borrowing rate has been at a record low of 2 percent since November 2020.

Forecasts on the MB’s decision today diverge on whether the key policy rate will start increasing this May or not until June. However, forecasters agree that the first upward move will be 25 basis points to 2.25 percent.