BSP urged to consider jumbo rate hike as inflation risks mount
A more aggressive half-point increase in the policy rate of the Bangko Sentral ng Pilipinas (BSP) merits “serious consideration” to help anchor inflation expectations and contain the risk of further price increases, New York-based GlobalSource Partners said.
In a note on Wednesday, Diwa Guinigundo and Wilhelmina Manalac, analysts at GlobalSource, warned that fast-rising prices could become more persistent, eroding household purchasing power and weakening consumer confidence. This is while economic activity remains weak and below potential.
That said, Guinigundo and Manalac, both former officials of the central bank, argued that a more forceful tightening is warranted, though they stressed the need to recognize the limits of monetary policy in addressing supply-side pressures.
The Monetary Board, the highest policymaking body of the BSP, will convene on Oct. 22 to decide on interest rates.
“The bank needs to respond not just to where inflation is today, but to where it appears to be heading,” they said, citing serious risks to the inflation outlook from high global oil prices, peso depreciation and the effects of the ongoing El Niño episode.
“Delaying an appropriate response could allow inflation to persist, eventually producing possible demand destruction as households cut consumption because their real incomes can no longer keep pace with prices,” they added. “Conversely, excessive tightening could further restrain investment, consumption, and growth.”
Results of an Inquirer poll of 20 economists showed 18 expect the Monetary Board to hike the policy rate by a quarter-point this week, while two forecast a larger half-point increase.
Since April, the BSP has raised its benchmark rate, which guides bank lending costs, by a total of 0.75 percentage point to 5 percent. The tightening campaign comes as the conflict in the Middle East fuels price pressures and the economy struggles to gain momentum, growing by just 2.6 percent in the first half of the year.
Price pressures
Latest data showed inflation had surged to a three-year high of 7.2 percent in September, far exceeding market expectations. Although much of the price pressure stems from supply constraints, economists say the BSP must keep inflation expectations in check to prevent a broader cycle of rising prices and wages.
Guinigundo and Manalac said the challenge for policymakers now is to act decisively enough to preserve price stability without unnecessarily deepening the growth slowdown. While a quarter-point increase would continue the tightening cycle, they argued that such a move may not adequately reflect the scale of deterioration in actual inflation and the outlook.
They added that monetary policy must be complemented with credible fiscal action and targeted measures to address food supply, energy costs and other structural sources of inflation.
“Monetary policy works with a lag. Waiting until all the risks have materialized could leave the BSP confronting a more persistent inflation problem, requiring a longer period of restrictive policy later,” Guinigundo and Manalac said.
“A 50-basis-point increase would send a stronger signal that the bank is determined to prevent temporary supply shocks from becoming a lasting feature of the inflation environment,” they added.
