IT’S too early for the country to “declare victory” against inflation, giving the Bangko Sentral ng Pilipinas (BSP) more reason to keep monetary policy tight longer than expected.
In a briefing on Wednesday, BSP Governor Eli M. Remolona Jr. told reporters that the monetary authorities do not expect any rate cuts soon.
However, Remolona said it is also unlikely that the Monetary Board, the highest policy-making body of the BSP, will increase rates further.
“You saw the inflation number yesterday [Tuesday]. It’s well within what we thought [it] would be. So, our models are more or less right. The models and the data seem to suggest that it’s still too soon to declare victory,” Remolona said.
“We seem to be on our way [to meeting our targets]. But there’s not enough data to assure us that we will settle comfortably within our target range of 2 to 4 percent. In terms of just the data, things look okay. But it’s not assured,” he also said.
Remolona said the proposal to increase minimum wages lodged at the Senate of the Philippines and the House of Representatives would be considered a supply shock to the economy.
The Senate has approved the P100 increase in wages, while the House of Representatives approved a P350 increase in wages. These proposals, Remolona said, will be considered as second round effects.
“[We are at] 3.4 percent. Our model was saying it’s going to be around 3.9 for the year. So it’s on the edge. So I can’t say that we’re going to ease [monetary policy] soon. I think it’s unlikely that we will tighten it some more. But we’ll see what the data says,” he added.
Upside risks to inflation that Remolona said would affect the BSP’s decision on monetary policy include rice inflation in the domestic market and oil prices in the international market.
In February, PSA said rice inflation increased by 23.7 percent and 26.3 percent for All Income and Bottom 30 percent households, respectively. (See: https://businessmirror.com.ph/2024/03/06/high-rice-prices-cited-in-3-4-february-inflation/)
National Statistician Claire Dennis S. Mapa said rice prices accounted for 49 percent or 1.6 percentage points of the inflation of all income households and 79 percent or 3.3 percentage points of the 4.2 percent inflation experienced by the poorest Filipinos.
“Rice prices are a source of upside risk. They are also what we call a salient price. Which means people tend to notice rice prices more than they notice other prices,” Remolona said. “[This] means it has an outsized effect on expectations. So we’re struggling with [this]. For now, we seem to be able to manage expectations. But rice is very popular. Locally it’s rice and then globally it’s oil,” he added.
Last month, the Monetary Board left the Target Reverse Repurchase (RRP) Rate unchanged for the second time. With the decision, the country’s key policy rate was 6.5 percent. The interest rates on the overnight deposit and lending facilities were kept at 6 percent and 7 percent, respectively.
BSP Monetary and Economic Sector In-Charge Iluminada Sicat said the monetary authorities would instead take a “more prudent monetary policy stance” given upside risks to inflation.
However, the economy’s growth is not safe from the impact of tight monetary policy. The BSP warned that the full impact of the rate hikes will be felt by the economy this year. (See: https://businessmirror.com.ph/2024/02/16/prudent-amid-inflation-risk-bsp-keeps-rates-again/)
Image credits: Bernard Testa