IMF: Time for BSP to use rate tweaks vs supply shocks

The Bangko Sentral ng Pilipinas (BSP) might have to employ policy rate adjustments not just as a tool to control demand-side price pressures but also against “more frequent and severe supply shocks” that can upset inflation expectations in the future, the International Monetary Fund (IMF) said.

In a country report, the IMF explained that supply-side problems had more influence on Philippine inflation than demand-side pressures in recent years, which can be attributed to the country’s increased dependence on imported commodities and the impact of climate change on food supply.

READ: IMF tempers PH growth outlook as high prices bite

That said, the Washington-based lender believes that rate adjustments may help manage inflation expectations, although it called for a “date-dependent approach and careful communication around policy settings.”

“The frequency, severity and persistence of adverse supply shocks may increase in the future, for instance due to climate change and rising geoeconomic fragmentation,” the IMF said.

“The BSP will need to be careful in ‘looking through’ them to ensure second-round effects do not lead to a de-anchoring of inflation expectations,” it added.

Latest government data showed Inflation, as measured by the consumer price index (CPI), quickened 2.5 percent year-on-year in November, from 2.3 percent in October. Year-to-date, inflation averaged 3.2 percent, well within the the 2 to 4 percent target range of the BSP.

Typhoons

State statisticians had said the destructive typhoons that slammed onto the country from late October to mid-November stoked vegetable price inflation. But that was offset by slower price gains of rice. Overall, food inflation accelerated to 3.4 percent in November from 2.9 percent in October, which was responsible for 65.9 percent of the spike in the headline rate last month.

As inflation remains benign, the BSP this month delivered a third quarter-point cut to the policy rate, unwinding the previous tightening actions that was one of the most aggressive in Asia.

That brought the key rate to 5.75 percent, with Governor Eli Remolona Jr. hinting at a continuation of a “measured” easing cycle next year.

For its part, IMF said the BSP has room to gradually reduce the policy rate “and move toward a neutral stance.”

“A measured reduction of the policy rate will be appropriate, given upside risks to inflation,” the Fund said.