About the money

Column box-John Mangun-Outside the Box

The past 10 days have seen the Bangko Sentral ng Pilipinas (BSP) make it to the front pages, the headlines, and the columns from local pundits.

Editorials shouted “Furor over polymer,” and some columnists came close to comparing BSP Governor Felipe Medalla to Hitler for introducing not only a newly designed P1,000 note but one that was made from plastic (polymer).

Because of SocMed, some people were convinced that replacing the abaca-cotton blend paper bill was a step that would require Filipinos to buy their pandesal with Chinese gold coins or maybe with Bitcoin. One broadsheet found it noteworthy to run a story with the headline “BSP: New P1,000 bill worth only P1,000.”

Apparently, that was because online sellers are still asking as much as P20,000 each for the new P20 coin supposedly because these are “brilliant uncirculated.” The BSP said there were no such P20 coins. SocMed capitalism at its finest.

As far as the new notes are concerned, apparently the fisherfolk, PUV drivers, and others of “the poorest of us” are going to have their lives shaken because of not being able to fold these new P1,000 bills with their callused, sweating fingers.

It is likely that the nation, the people, and the economy will survive “the debasement of our heroes and a world-class Philippine fiber.” Actually, I prefer my polymer BPI debt card or GCash, which incidentally my rice vendor at the BF Wet Market accepts.

A more critical topic for discussion—and more complicated—is the move by the BSP to raise its key overnight borrowing rate by 75 basis points or 0.75 percent. This came at a special meeting of the Monetary Board and was unexpected to happen this soon. This was done to “signal its readiness to take further policy action to cool surging prices.” Not completely accurate.

There are two broad types of inflation, “an increase in the prices of generally purchased goods.” “Demand-Pull inflation” occurs when the relationship between consumer demand and producer supply is out of balance. Avian flu reduces chicken supply as people still want to eat the same amount of poultry and prices go higher.

A government can make borrowing money “cheaper” or give away money through stimulus checks and suddenly people have more cash to buy cars, caviar, and cocaine, and increased demand raises prices. Central banks can raise interest rates to reduce borrowing to reduce Demand-Pull inflation.

The other type of inflation is “Cost-Push inflation,” which is what the Philippines usually as now is experiencing. Rising global oil prices increase transportation and fertilizer costs and vegetables coming from the North become more expensive. The production cost of the legumes increases the consumer cost and creates Cost-Push inflation. Raising interest rates does little if anything to reduce this type of inflation, unless of course you believe that Saudi Arabia will lower its selling price of crude because the Philippine central bank raised its interest rate.

The BSP raised interest rates because it wanted to slow if not stop the weakening of the peso. And the BSP did not want to lose control of the peso exchange rate.

Demand for pesos instead of dollars is in part because of foreigners and local banks that might buy pesos to deposit to get a higher interest rate. The Philippine Overnight Deposit Interest Rate for pesos is now 2.75 percent from the previous 2 percent. That is a significant increase. By comparison, the rate in Indonesia is also 2.75 but is much lower in South Korea (2.11), Malaysia (1.56), Thailand (0.41) and Australia (0.1).

Certainly, a weak peso is one part of the “Currency-Induced Cost-Push Inflation” equation. Further, it is now likely if not obvious that the BSP has been intervening in the currency market buying pesos. That may be an important if “secret” reason that the Foreign Exchange Reserves have been decreasing for the past three months as the peso has been going down.

Finally, most of life is “show biz” in that impressions and perceptions are as important as reality. It is good optics to see the BSP firmly and fully in charge and taking action.

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

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