‘The Story of the Three Bears” is one of the most popular fairy tales in the English language. It has evolved over the past century to tell the story of a young girl who wanders into the house of a family of bears. She finds three bowls of porridge, and one is too hot, one too cold and one “just right.”
This past week Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno described the current Philippine economic condition. He said that the Philippine economy has entered “a state of having ‘just the right’ mix of high growth and low inflation.”
While an oversimplification, from a central banker’s point of view, the “Goldilocks” idea of inflation/economic growth is exactly the objective. In this age of manually controlled interest rates and money supply, this is the mix that the BSP is looking for.
It is similar to the operation of an internal combustion engine. For the engine to function efficiently there must be a balance between the amount of air and the amount of fuel. Monetary policy is aiming for just enough inflation to create investment and spending today rather than waiting for tomorrow. Japan has lived through decades of flat economic growth because consumers in particular felt no urgency to buy today. If you know that the price of a refrigerator will be higher next year, then you might make a purchase now rather than later.
However, we also need to look at the balance—the Goldilocks effect—in relation to other economies. Maybe it was “just right” for Goldilocks because she had low tolerance for hot and cold temperatures. How is the Philippine economy balanced?
The monetary policy of similar economies is now geared to lower interest rates, and the cost of money in general. Policy-makers in Russia, India, Sri Lanka and Chile all cut their key policy interest rates. Like the BSP, the Reserve Bank of India has also signaled future interest-rate decreases.
But the current data shows that the Philippine economy is just right based on a variety of factors. However, we need to look at nations such Egypt, Turkey, Malaysia, and also China and South Korea.
All these economies have various inflation rates and economic growth, therefore having different policy goals. But those policies also depend on current conditions. Nominal interest rates range from 66 percent in Argentina to 1 percent in Hungary. The Philippines is slightly lower than the middle of the group.
Real Interest Rates taking into account inflation go from Argentina’s 13 percent to negative 3 percent in Hungary. The Philippines is slightly above the middle at 2+ percent. Currency movement against the US dollar shows the peso with slight appreciation than the others for the past month. The same is true for the increase in our local stock market. Also important and interesting is that the market interest rate on Philippine government debt denominated in US dollars is exactly in the middle, tracking the move of US government debt perfectly, as does Indonesian debt.
The point is that in comparison with our economic peers, Governor Diokno is correct. The internals show that overall, the Philippine economy is performing just right in regard to those factors that are influenced by BSP monetary policy.