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BSP ready to further tweak policy to contain inflation

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The Bangko Sentral ng Pilipinas reaffirmed its readiness to tweak its monetary policy stance to rein in inflation in the coming months.

It made the assurance in an open letter to President Ferdinand Marcos Jr. that explained why inflation in 2022 hit 5.8 percent and exceeded the target range of 2 percent to 4 percent.

The BSP said any further monetary policy actions would always depend on pertinent economic data. The Monetary Board, the policy-making body of the BSP, raised the policy rate by a total of 350 basis points to 5.5 percent in 2022.

“The BSP will continue to adjust its monetary policy stance as necessary to keep further second-round effects at bay and to prevent inflation expectations from becoming disanchored,” the BSP said in the letter signed by Deputy Governor Francisco Dakila Jr. as officer-in-charge.

Governor Felipe Medalla was part of the Philippine delegation that held a Philippine economic briefing in Frankfurt, Germany last week.

“Our approach to monetary action will remain data-dependent and contingent on the inflation outlook, along with other available macroeconomic information at a given point in time,” the BSP said.

Inflation in December slightly accelerated to a more than 14-year high of 8.1 percent from 8 percent in November on faster increases in the prices of food and non-alcoholic beverages.

The December outturn was faster than 3.1 percent in the same month in 2021. This brought the full-year average to 5.8 percent, beyond the government’s target range of 2 percent to 4 percent for the year and faster than 3.9 percent in 2021.

Headline inflation started to rise in March as domestic fuel pump prices increased, reflecting the uptrend in international crude oil prices.

Global crude prices surged in 2022 amid concerns over tighter supply arising from the geopolitical conflict in Eastern Europe and from major oil-producing countries’ decision to lower production targets, the BSP letter said.

It said that as inflation began to spike across countries, and central banks responded with tighter monetary policy, investor concerns over global demand also tempered further price hikes.

A confluence of global and local supply shocks drove food prices higher. Higher energy prices led to significant increases in fertilizer and farming costs, while concerns over food security prompted countries to impose export restrictions, resulting in tighter global supply of key food commodities, the BSP said.

It said that domestically, animal diseases such as the African Swine Fever and Avian Influenza affected domestic meat production. The impact of successive typhoons on agricultural production, particularly in the second half of 2022, added to the supply-side constraints on some key food items like fish and vegetables.

The effects of low agricultural productivity combined with lingering import restrictions also kept sugar and food prices high, it said.

“Meanwhile, as the domestic economy continued to recover from the pandemic, robust pent-up demand also began to contribute to price pressures, as shown in the higher core inflation for 2022 relative to the previous year,” the BSP said.

It said that as other central banks also raised their policy rates aggressively to combat inflation, volatility in financial markets increased and the peso depreciated, leading to higher importation costs.

“The combined rise in food and energy prices eventually spilled over to the prices of other commodities and services, such as transportation and restaurant services,” it said.

Broadening inflation pressures also led to second-order effects, in the form of approved petitions for transportation fare adjustments, minimum wage increases and a sustained buildup in the inflation expectations of analysts and the broader public.

The BSP said that in response to rising inflation and the emergence of second-round effects, it undertook firm action to bring inflation back to target. The BSP said it raised its policy interest rate, the interest rate on the overnight reverse repurchase facility, by a total of 350 basis points to 5.5 percent from a record-low of 2.0 percent at the onset of the pandemic.

It said the decision was guided by the inflation outlook, which showed inflation rising above the inflation target band through most of 2022 and 2023.

“The successive increases in the monetary policy interest rate were therefore aimed at bringing inflation back within the target range as soon as possible. The BSP’s monetary policy response is also meant to manage inflation expectations by mitigating second-round effects and tempering pressures on the Philippine peso,” it said.

The BSP said its latest forecasts show inflation peaking in December 2022 and decelerating in 2023 on easing global oil and non-oil prices, the negative base effects from transport fare adjustments in 2022 and the impact of the cumulative policy rate adjustments of the BSP.

It said inflation was expected to revert to the target range of 2 percent to 4 percent by the second half of 2023.


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