THE Bangko Sentral ng Pilipinas (BSP) is keeping true to its monetary policy playbook, despite the unexpected rise in inflationary pressures which are projected to linger in 2022.
In their latest monetary policy meeting, BSP governor Benjamin Diokno maintained monetary policy rates at a record low of 2 percent, even while conceding that inflation is likely to breach the target range again for this year.
Diokno explained the Philippines continues to have room to maintain monetary policy settings to support and solidify the growth of the economy from the effects of the pandemic.
“On balance, the Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty, even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures,” Diokno said.
All-time low rates
In 2020, the BSP cut its rates by a total of 200 basis points to its now all-time low to spur growth in the economy. The governor decided to maintain this accommodative stance for the entire year in 2021.
For 2022, the BSP chief’s forward guidance is to keep the rates in the first half of the year and start hiking rates “gradually” by the second half.
In his most recent statement on their stance towards monetary policy, the governor said: “While sustaining the economic recovery remains a priority, the BSP stands ready to move should potential second round effects arise from the inflation pressures. At the moment, we continue to see scope for maintaining our policy settings to allow the economic recovery to fully gain traction.”
Economists, however, have expressed concern about Diokno’s decision to keep the monetary policy rates for as long as possible. They said this may unhinge inflation expectations, especially due to unforeseen developments in 2022 like Russia’s invasion of Ukraine which has caused oil prices, as well as commodity prices, to spike in the world market.
Besides oil, economists are keeping an eye out on inflation being stoked by the supply crunch in wheat—of which both Russia and Ukraine are major producers—and fertilizer, which Russia exports abundantly, and the prices of which have in fact already been soaring the past several months.
The farming and fishery sector has been reeling from both inflation in oil and in fertilizers.
Losing inflation battle
As he expected the BSP to keep rates low ahead of its March 24 monetary board meeting, ING Bank economist Nicholas Mapa had warned: “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. 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.”
The ING economist went on to say that aside from the timing, BSP’s plan of “gradually” normalizing rates may also not come into fruition.
“Should consumers and firms begin to believe that inflation is here and it is here to stay, credibility in the BSP’s inflation fighting capability will fade, leading to Filipinos pricing in even more inflation down the line. Once this happens, the country may fall into a price spiral, with the BSP unable to corral runaway inflation expectations. A delay in any form of tightening to the second half runs the very real risk of BSP losing a grip on inflation expectations and will lead to BSP behind the curve, a position not easily addressed by a token rate hike or two,” Mapa said.
In 2021, the BSP missed its inflation target range of 2 to 4 percent. Inflation during the year hit 4.5 percent due to significant increases in food and energy prices. For 2022, they earlier projected inflation to return back to the target range. In their latest meeting, however, the BSP announced that their latest projections point to an average inflation rate of 4.3 percent.
Aside from their inflation outlook, the BSP has also pivoted its projection for the country’s balance of payments (BOP) for 2022. The BOP is the summary of all of the country’s transactions with the rest of the world. A surplus means the country earned more dollars than what it spent in a given period, while a deficit indicates the opposite.
Earlier this month, the BSP said its emerging 2022 overall BOP position is seen to reverse to a deficit of $4.3 billion from its projection of a surplus of $700 million in the December 2021 projection exercise.
“The assessment of the BOP outlook for 2022 and 2023 takes on a more guarded view as the ongoing Russia-Ukraine conflict complicates the global and domestic recovery picture, magnifying the disruptions and uncertainties caused by the pandemic. The heightened volatility in both international financial and commodity markets could spill over to the domestic economy of emerging market economies including the Philippines,” the BSP governor said.
Image credits: Nonie Reyes