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Philippines: BSP could lose control of inflation – analyst
THE Bangko Sentral ng Pilipinas (BSP) risks losing control of inflation if it continues to delay the tightening of its monetary policy, an analyst warned.
Nicholas Antonio Mapa, ING Bank Manila senior economist, said in a commentary released on Wednesday that despite rate hikes by the world’s most important central banks — with promises of more to come — and a potential and likely breach of the country’s inflation target in 2022 and 2023, BSP Governor Benjamin Diokno remains dovish on monetary policy.
He emphasized Diokno’s preference for waiting until the second half of the year to raise the Bangko Sentral’s already record-low interest rates.
“Espousing data dependency, Diokno suggests that the economy may need additional support in the coming months. For the entirety of the pandemic, this has been Diokno’s battle cry as he hopes to help bolster the broader government’s recovery efforts,” Mapa remarked.
While the BSP chief has advocated for guiding policy based on how data evolves in the next months, he said the repercussions of the ongoing crisis in Eastern Europe has already pushed inflation estimates substantially higher, with ING now forecasting 4.3-percent inflation this year.
This is faster than the Bangko Sentral’s 2- to 4-percent target range for this year.
The ING Bank analyst said the Philippines has already felt the impact of rising commodity prices in terms of a bigger trade deficit. Meanwhile, the Philippine peso has been battered by a double whammy of United States Federal Reserve policy divergence and a weak external position, falling to the region’s third-worst depreciation as of Wednesday.
“A weaker currency begets even more inflation as it forces up the cost of all imports, complicating matters further,” he cautioned. “On top of substantial supply side pressure, we may also see price pressure fanned from the demand side as the BSP’s own forecast expects the output gap to close as early as 3Q (third quarter).”
Overall, Mapa added, data indicate that inflation will exceed the target this year and possibly next, despite the fact that growth prospects remain favorable. Nonetheless, the Bangko Sentral’s guidance remains a calendar assessment, indicating the second half of 2022 for the start of its normalization cycle.
While Diokno has said that the BSP does not need to “move in step” with other central banks, Mapa believes the US Fed had already lifted rates by a total of 100 basis points by the second half of the year.
“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,” he warned. “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 economist also said if consumers and businesses begin to believe that inflation is here to stay, confidence in the Bangko Sentral’s ability to combat inflation will erode, leading to Filipinos pricing in even more inflation in the future.
He warned that if this happened, the country could be thrown into a price spiral, with the BSP unable to control rising inflation expectations.
“A delay in any form of tightening to the 2H (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 concluded.
Today, Thursday, is the second rate-setting meeting of the Bangko Sentral’s policymaking Monetary Board for 2022.
Source: https://www.manilatimes.net/2022/03/24/business/top-business/bsp-could-lose-control-of-inflation-analyst/1837379