MANILA, Philippines – The Bangko Sentral ng Pilipinas is unblinking at the threat of inflation as it sticks to its original plan to recall all its pandemic-era support to the economy in the second half to support the recovery.
State statisticians reported Tuesday morning that inflation had nearly exceeded the government’s 2-4% target after accelerating to 4% year-on-year in March, the fastest pace in six months amid a uninterrupted rise in oil prices due to the Russian-Ukrainian war. But in an economic briefing hours after the data was released, BSP Governor Benjamin Diokno said the central bank still would not change the timing of its “disengagement” plan.
“We are still on the right track despite the Russian-Ukrainian crisis, we are still looking at the second half of the year for a normalization strategy,” Diokno said.
This means that while other central banks have already begun their exit strategy, the BSP will remain dovish by keeping its benchmark rates at a record high of 2% for much longer. Last month, the US Federal Reserve raised its key rate for the first time in three years and telegraphed that the takeoff would be the first in a series to fight inflation in the United States.
READ: BSP: in no rush to match US Fed rate hike
So far, Diokno said the BSP has already reduced its emergency loans to the government. The last BSP cash advance will be paid by the government on June 12, before the new president takes office. “By the time the new administration takes over, there will be no more advances from BSP,” the central bank chief said.
By not joining the global rate-hiking club, Diokno hopes the government will take the lead in tackling inflation through “direct non-monetary measures” as the BSP is still busy nurturing a nascent economic recovery. .
But given its struggle to close a large budget deficit, the Duterte administration admitted there was little it could do to lessen the sting of inflation. Meanwhile, the government has been reluctant to deal with proposals to raise transport fares and wages, fearing these will further stoke inflation.
That said, Sonny Africa, executive director of the IBON Foundation, a nonprofit think tank, believes that “economic recovery can still benefit from more liquidity and monetary accommodation.”
“For the BSP, the spike in inflation should indicate how many poor families and small businesses are still struggling and how government intervention is still needed,” Africa said.
But Nicholas Mapa, senior economist at ING Bank Manila, argued that the BSP risked “retarding the curve and losing its grip on inflation expectations”. If that happened, there would be nothing to prevent borrowing costs from rising while the BSP would fail to curb price spikes.
“With inflation likely to top this year and core inflation possibly already above target, further delays in policy normalization increase the risk of inflation expectations spiraling out of control, an episode that would require a even more forceful and traumatic adjustment on the part of the BSP”, warned Mapa.