NextGen Day

To assist prevent a further rise in the second-round consequences of the increased inflation rate, the Bangko Sentral ng Pilipinas (BSP) has committed to keeping raising its key policy rates “when necessary.”

The increases also seek “to prevent inflation expectations from getting disanchored,” according to BSP Officer-in-Charge Francisco Dakila Jr. in an Open Letter to President Ferdinand R. Marcos Jr. dated January 24, 2023.

According to him, “Our approach to monetary action will remain data-based and depending on the inflation outlook, coupled with other available macroeconomic factors at a particular point in time.”

The Open Letter, which was published on the BSP website on Friday, was written to outline the causes of the government’s 2 to 4 percent inflation target band’s breach.

Last year, the average pace of price rises was 5.6 percent, and the level in December—8.1 percent—was the biggest since November 2008.

When the monthly inflation rate increased from 4 percent to 4.9 percent on an annual basis in April of last year, it went beyond the government’s target range.

According to the BSP, domestic fuel pump prices started to rise in March of last year “when domestic fuel pump prices increased, reflecting the upswing in international crude oil prices.”

Concerns about tighter supply circumstances in light of the impact of geopolitical events in Eastern Europe and the decision by oil-producing countries to cut production targets were blamed for the increases in oil prices on a worldwide scale.

The BSP explained that central banks all over the world started raising their separate key rates as the rate of price increases started to accelerate.

The BSP stated that this, along with domestic supply restrictions on a number of food items like sugar, fish, and vegetables, as well as supply shocks on the international market brought on by higher energy prices, which increased the cost of fertilizer and farming inputs, increased inflation concerns.

This contributed to continued financial market volatility, which in turn depreciated the peso and raised import prices.

Last year, pent-up demand also contributed to pricing pressures, which led to an increase in both headline inflation and core inflation, which excludes volatile commodities like food and oil.

Eventually, rising inflation’s second-round impacts were visible, as evidenced by increases in the minimum wage and transportation costs.

The BSP started raising its key rates in May of last year as a result, stating that the recovery of the economy is thought to mitigate the effects of the rate increases.

The Monetary Board (MB), which sets policy at the central bank, raised the BSP’s key policy rates for the overnight reverse repurchase (RRP) facility by a total of 350 basis points last year, to 5.5 percent.

This represents a change from the rate reductions implemented in 2020, which reduced the RRP to a record-low 2 percent and were intended to promote lending and other economic activity in order to lessen the impact of the epidemic on the domestic economy.

In light of these events, the central bank stated that its most recent projection shows that inflation likely peaked in December of last year and will slow this year as the cost of oil and non-oil commodities declines on the global market.

According to the report, the base effects of significant rate increases and the cost of transportation are also anticipated to slow the rate of inflation this year.

By the second half of 2023, “inflation is likely to revert to the 2-4 percent target range,” the report stated.

While largely balanced for 2024, the BSP stated that the “balance of risks surrounding the inflation outlook are considerably skewed towards the upside in 2023.”

“Trade restrictions, higher prices of fruits and vegetables due to potential domestic weather disturbances, higher sugar prices, as well as pending petitions for transport fare hikes and potential wage adjustments in 2023” are the main sources of upside risks to the inflation outlook over the policy horizon, according to the report. However, it is believed that the consequences of a weaker-than-expected global recovery balance out these variables.

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