Philippines: Central Banks urged to focus on core inflation

• Feb 22, 2023

MANILA, Philippines — The International Monetary Fund (IMF) has cautioned central banks (CBs) in Asia and the Pacific to stay alert as core inflation is still running above target despite the easing of headline inflation.

Krishna Srinivasan, Thomas Helbling and Shanaka Jay Peiris said in a blog that economic headwinds that the region faced last year have started to fade due to lower food and oil prices as well as the economic rebound in China.

The multilateral lender said inflation in Asia is poised to moderate after peaking during the second half of 2022.

However, the IMF said core inflation is proving more persistent and has yet to ease definitively. Core inflation, which excludes volatile items such as energy and food, represents the long run trend in the price level.

“While inflation is moving in the right direction, central banks need to stay alert. Core inflation is still running above target. The big supply shocks and permanent structural realignments associated with the pandemic have made calibrating monetary policy particularly challenging,” the authors said.

They pointed out that signals in the data about second-round effects are mixed, further heightening uncertainty for policy makers.

In the Philippines, headline inflation quickened to a fresh 14-year high of 8.7 percent in January from 8.1 percent in December, while core inflation zoomed to 7.4 percent from 6.9 percent.

Inflation zoomed to 5.8 percent last year, way above the two to four percent target range set by the Bangko Sentral ng Pilipinas (BSP) from 3.9 percent in 2021 due to soaring global oil prices due to Russia’s invasion of Ukraine, as well as elevated food prices due to supply shocks caused by China’s zero-COVID policy.

The BSP now sees inflation accelerating further to 6.1 percent instead of 4.5 percent for 2023 and to 3.1 percent instead of 2.8 percent for 2024.

This prompted the BSP to hike key policy rates by 400 basis points since it started its interest rate liffoff in May last year, including the recent 50-basis-point hike on Feb. 16, to tame inflation and stabilize the peso.

This brought the benchmark interest rate to a 16-year high of six percent from an all-time low of two percent.

To further keep second round effects at bay and anchor inflation expectations, BSP Governor Felipe Medalla said another 25- to 50-basis-point hike is on the table in the next rate-setting meeting of the Monetary Board scheduled on March 23.

The IMF said the gross domestic product (GDP) growth in the region may accelerate to 4.7 percent this year from last year’s 3.8 percent, making it by far the most dynamic in the world’s major regions and a bright spot in a slowing global economy.

The multilateral lender sees GDP expansion in advanced economies that include Australia, New Zealand, Japan, Hong Kong, Korea and Singapore slowing to 1.9 percent this year from 2.1 percent last year.

On the other hand, it expects the economic growth in emerging market and developing economies picking up to 5.3 percent from 4.3 percent. This will be led by Cambodia (6.2 percent) followed by India (6.1 percent), Bangladesh (six percent) and Vietnam (5.8 percent).

The Philippines is expected to post a slower GDP growth of five percent for this year before accelerating to six percent for next year from last year’s 7.6 percent, slightly higher than the six to seven percent growth target set by economic managers.

The IMF pointed out that fiscal deficits during the pandemic and higher long-term interest rates over the past year added to public debt burdens.

With several Asian countries facing debt distress, it added that authorities must continue with their plans for gradual fiscal consolidation.

“Doing so will also ensure that monetary and fiscal policies are not acting at cross purposes,” it said.

Finally, the IMF said several Asian countries face elevated financial vulnerabilities, with high leverage across household and corporate sectors and significant bank exposure to real estate downturns.

“This suggests subtle policy trade-offs between controlling inflation and ensuring financial stability, and a need to strengthen resolution frameworks,” it said.

Source: https://www.philstar.com/business/2023/02/22/2246622/central-banks-urged-focus-core-inflation