Bangko Sentral hints on policy tightening

THE Bangko Sentral ng Pilipinas (BSP) has hinted at abandoning its accommodative monetary policy stance, admitting that rising inflation rates are now having second-round effects on consumers.

"Given how the April 2022 inflation of 4.9 percent settled near the higher end of the BSP's forecast range of 4.2 to 5 percent, the space for maintaining an accommodative policy stance has considerably narrowed," BSP Governor Benjamin Diokno said in a virtual briefing on Wednesday.

In recent months, he said, inflationary pressures have been mostly caused by supply side factors, which monetary authorities feel are still best addressed by focused non-monetary initiatives by the national government.

"Meanwhile, second-round effects are starting to manifest," Diokno added, noting that the recent approval of wage hikes in the National Capital Region and Western Visayas opens the door for further increases in other regions, as wage petitions have been deferred since 2020 due to the Covid-19 pandemic's disruption of economic activities.

He went on to say that all of this is happening at the same time as the Philippine economy outperformed forecasts, increasing 8.3 percent year over year in the first quarter of the year.

While the economy now appears to be on course to returning to pre-pandemic levels, there are still substantial downside risks to growth, the Bangko Sentral chief warned, including the danger of a recurrence of Covid-19 infections and a slowing of global economic activity.

"These developments strengthen the case for a withdrawal of monetary policy accommodation," he said, "as inflationary pressures now appear more likely to persist and threaten to disanchor inflation expectations."

Diokno added that while the central bank is prepared to cope with this threat to inflation and economic growth, any changes in the monetary policy stance will be made as soon as possible to avoid disrupting the current momentum and to prevent pricing pressures from getting entrenched.

"The Monetary Board will continue to discuss tomorrow (May 19) the implications of these developments on the monetary policy stance, and we will inform you of the decision after the meeting," he continued.

Capital Economics, ANZ Research, Moody's Analytics and the Bank of the Philippines expect the BSP to end its accommodative monetary policy stance this month by raising interest rates for the first time since the Covid-19 pandemic began.

The Philippine economy's faster-than-expected 8.3-percent gross domestic product growth in the first three months of the year, as well as rising inflation rates, influenced their views for the central bank's Monetary Board meeting on May 19.

Source: TheManila Times