The Bangko Sentral ng Pilipinas should respond with a tighter policy stance if inflation continues to accelerate in the coming months, the International Monetary Fund said in a report released to the media Tuesday.
This was contained in the recent conclusion of the 2022 Article IV consultation with the Philippines by the IMF’s executive board.
The IMF said the BSP’s prompt action to fight inflation was welcome, but further monetary tightening might be needed to keep inflation expectations well anchored.
“The current policy stance remains accommodative, and BSP should aim at bringing the policy rate close to the neutral real rate to securely bring inflation within the target range. Should inflation pressures continue to rise, the BSP should respond with a tighter policy stance,” the IMF said.
“Similarly, if inflation proves less persistent, or if significant downside risks to growth materialize, monetary policy tightening would need to be recalibrated. Clear communication about inflation and the BSP’s policy intentions can help reduce uncertainty and improve policy transmission,” it said.
The policy-setting Monetary Board of the BSP on Nov. 17 raised the benchmark policy rate by 75 basis points to a near 14-year high of 5 percent to rein in inflation and support the peso. The last time the policy interest rate reached 5 percent was in February 2009.
BSP Governor Felipe Medalla said the latest baseline forecasts indicated a higher inflation path over the policy horizon, with average inflation breaching the upper end of the 2 percent to 4 percent target range in both 2022 and 2023 at 5.8 percent and 4.3 percent, respectively. The forecast for 2024 was also raised to 3.1 percent.
The IMF said calibrating the policy mix to preserve macroeconomic stability, enhancing fiscal and financial resilience and accelerating structural reforms were critical to sustaining the recovery.
It said monetary and fiscal policy were aligned in the right direction to support external and domestic balance.
“A tightened policy stance will keep inflation expectations anchored and help alleviate pressure on capital outflows and the exchange rate. Exchange rate flexibility remains important as a shock absorber against the backdrop of persistent terms of trade shock and a wider current account deficit. Policies will have to remain nimble, carefully balancing growth and price stability objectives, while managing limited fiscal buffers, preserving financial stability, and ensuring external sustainability,” it said.
Inflation in October accelerated to an almost 14-year high of 7.7 percent from 6.9 percent in September 2022, driven by faster increases in the prices of food and non-alcoholic beverages. It was also faster than 4 percent in the same month last year.
This brought the average inflation in the first 10 months to 5.4 percent, above the target range of 2 percent to 4 percent set by the government.
The IMF in October maintained its growth forecasts for the Philippines at 6.5 percent for 2022 and 5 percent for 2023, taking into account the strong 7.8-percent first-half expansion.
The IMF said the outlook for 2023 was more challenging due to unsettled conditions in major advanced economies.