BANGKO SENTRAL ng Pilipinas (BSP) Governor Benjamin E. Diokno on Thursday said policy makers are not inclined to tighten monetary policy yet as they see the uptick in inflation as “temporary,” with pressures coming from the supply side.
“Notwithstanding the impact of supply-side factors on the inflation path, we are not inclined to tighten monetary policy at this time,” Mr. Diokno told reporters at an online briefing on Thursday.
Headline inflation stood at 4.7% in February, the highest since December 2018’s 5.1% reading and marking the second month it breached the BSP’s 2-4% annual target. Data from the Philippine Statistics Authority showed the rise in the consumer price index was fueled by price hikes in staples such as meat, fish, and rice.
Mr. Diokno attributed inflation’s climb in the past months to supply-side factors such as the weather disruptions in the latter part of 2020, the African Swine Fever outbreak, and the higher global oil prices. The government has responded to these with non-monetary measures such as imposing a 60-day price cap for pork and chicken products and easing import restrictions for pork.
“Following the standard approach of central banks in responding to supply-side shocks, the BSP typically accommodates the initial effects of supply shocks as these tend to be short-lived in nature,” Mr. Diokno said.
The central bank in February kept the overnight reverse repurchase, lending, and deposit rates at record lows of 2%, 2.5%, and 1.5%, respectively. It, however, raised its inflation forecast for the year to 4% from 3.2% previously.
Last year, the BSP slashed rates by a total of 200 basis points to support the economy. The Monetary Board will have its next policy-setting meeting on March 25.
Mr. Diokno yesterday stressed the importance of managing inflation expectations by informing the public about where higher prices are coming from.
“Core inflation has been generally stable. With the ongoing health crisis, demand-side price pressures are mostly subdued,” he said, noting this is mainly due to the high unemployment level and subdued lending activity.
Core inflation, which excludes volatile prices of food and fuel, quickened to 3.5% in February from 3.4% in January.
The central bank chief said an oil price shock could trigger secondary effects through adjustments in inflation expectations, clamor for wage hikes, and spillovers to other prices such as transport fares and utility charges.
Right now, however, Mr. Diokno said there is “limited evidence” of such second round effects.
The central bank’s pledge to remain accommodative will help the economy recover, ING Bank NV-Manila Senior Economist Nicholas Antonio T. Mapa said in a note.
“Wielding monetary tightening to address this type of inflation would never truly stamp out cost-push inflation with rate hikes likely unable to make pork prices cheaper, vegetables less costly, flatten global oil prices nor reverse pandemic-inspired social distancing guidelines that limit tricycle passenger capacity,” Mr. Mapa said.
“Adjusting monetary policy for anything other than getting prices in line or supporting the stimulus efforts will likely need to take a backseat for now,” he added.
Meanwhile, the BSP may have to scale down its bond purchases in case the US Federal Reserve becomes less accommodative, Maybank Kim Eng said in a separate note.
“The Philippines and Indonesia do not enjoy the privilege of having a reserve currency and remain dependent on foreign financing. An early Fed taper could bring an end to the weak US dollar environment and penalize the Indonesian rupiah and Philippine peso for monetizing their fiscal deficits and bond-buying programs,” it said.
Maybank Kim Eng noted that the BSP and Bank Indonesia may “have to pull back from bond buying if their currencies see a sharp sell-off or inflation jumps.” — L.W.T. Noble