PH to lean on rate hikes to arrest inflation

INQUIRER PLUS GRAPHICS

With war-related price shocks fueling price hikes, the Philippines may have little choice but to lean on higher interest rates to control inflation, as the government lacks the fiscal room for costly subsidies or sweeping price controls, Capital Economics said.

In a note to clients, Gareth Leather, senior Asia economist at Capital Economics, said the Philippines was among the economies that have allowed higher fuel prices to pass through to consumers as a limited fiscal space constrained the government’s ability to tackle the supply shock.

As a result, Leather noted that the Philippines had to raise interest rates to tame inflation, joining Pakistan and Singapore in tightening monetary policy.

Meanwhile, countries like Korea, Indonesia, Taiwan, China, India, Japan and Malaysia saw relatively subdued inflation as their governments have intervened to control prices, either in the form of subsidies or price controls. But Capital Economics said the financial costs of such interventions may force these economies to change their approach.

“This raises the risk that inflation could accelerate much more markedly in economies where price pressures have so far remained relatively subdued,” Leather wrote.

“If the crisis proves more prolonged, the fiscal cost of maintaining subsidies and price controls will continue to grow and governments will face increasing pressure to pass a larger share of higher energy costs on to consumers and businesses,” he added.

At home, consumer prices rose 7.2 percent from a year earlier in April, the fastest pace in three years, as higher energy costs quickly spilled over to other household essentials.

The April surge marked the second straight month inflation breached the central bank’s 2 percent to 4 percent target range. The Philippine central bank raised its key policy rate by a quarter point to 4.5 percent at its April 23 meeting amid a “deteriorating” inflation outlook.

Policymakers also said they are “committed to fulfilling its primary mandate of slow inflation and will take necessary actions to ensure inflation returns to its 3-percent target within a reasonable time.”

“Since the onset of the Iran war and the subsequent rise in global energy prices, inflation has accelerated markedly in economies with limited subsidies or price controls,” Leather said.