Philippines – BSP: Rate hikes not enough to fight inflation

MANILA, Philippines — Various non-monetary measures and safety net programs of the government are necessary to control the continued increase in prices as raising interest rates alone would not be enough to curb rising inflationary pressures, according to the Bangko Sentral ng Pilipinas.

BSP officer-in-charge Chuchi Fonacier said the central bank is reassessing its inflation forecasts and ready to take strong immediate action using the full range of instruments in its toolkit to rein in emerging threats to inflation and inflation expectations.

Fonacier said the BSP, like most central banks, recognizes that the capacity of interest rate hikes to combat inflation is not absolute, particularly when price spikes are due to supply-side forces that are beyond the direct influence of the central bank.

“Thus, taming inflation and addressing its root causes will also require mitigating measures from other government agencies, including curbing opportunistic behavior by traders and producers,” she said.

She said the BSP remains strongly supportive of the various non-monetary measures and safety-net programs of the government, including measures to augment domestic food supply through importation and closer monitoring of prices of key commodities.

Inflation leapt to a fresh nine-year high of 6.4 percent in August from 5.7 percent in July, bringing the average to 4.8 percent in the first eight months.

Since early this year, price pressures have been building up largely on account of supply-side factors such as rising international oil prices, the impact of higher excise taxes on selected consumer items, as well as rising food prices due to weather and supply distribution disruptions in certain commodities.

However, evidence of rising inflation expectations and early signs of second- round effects underscored the risk posed by sustained cost-push pressures on prices and wages. At the same time, potential price pressures have arisen from excessive volatility in the foreign exchange market.

The BSP has so far raised benchmark rates by 100 basis points this year to rein in inflationary pressures. It lifted interest rates by 25 basis points for the first time in more than three years last May 10, followed by 25 basis points last June 20, and another 50 basis points – the biggest in 10 years – last Aug. 9.

The BSP is expected to deliver another “strong monetary action” on the rate-setting meeting of the Monetary Board on Thursday as the damage from Typhoon Ompong particularly on agriculture initially estimated at P17 billion is expected to put more upside risks to inflation.

Notwithstanding inflation concerns, Fonacier said the economy continues to be robust, exhibiting sustained real gross domestic product (GDP) growth above the historical average of 5.2 percent and supported by sound macroeconomic fundamentals.

The GDP expansion eased to a three-year low of six percent in the second quarter from 6.6 percent in the first quarter, bringing the average to 6.3 percent in the first half. Economic managers set a GDP growth of between seven and eight percent this year.

Noelan Arbis, economist at British banking giant HSBC, said the upside risks to inflation and the fact that it is largely being driven from the supply-side, such as higher food and oil prices, emphasize the need for a non-monetary response.

Arbis said the government proposed nine measures to contain inflation, including easing import restriction rules on key commodities like rice and sugar.

“We see these as positive reforms that would have a bigger impact on taming inflation in the near-term than solely monetary policy. Timely implementation of these reforms is thus needed to curb inflation and ensure that inflation comes down to within target by 2019, “ Arbis said.