The Bangko Sentral ng Pilipinas (BSP) intends to continue raising interest rates as a precautionary measure against the second round effects of inflation.
In a briefing on Tuesday, BSP Governor Felipe M. Medalla said inflation is still expected to be within target by the third quarter of the year and will be closer to 2 percent rather than 3 percent by late 2023 or early 2024.
Based on the recent charts he reviewed, Medalla said inflation expectations are building up and that sectors that have very little inputs, such as services, have become expensive.
“Those are signs that inflationary pressures are broadening, and we’re getting to the point where second-order inflation is beginning to be a concern. Until that is addressed, we cannot say ‘hindi puwedeng mag-rate hike,’” Medalla told reporters in an interview following a press briefing in Mandaluyong City on Tuesday.
Medalla said raising interest rates by another 25 or 50 basis points would serve as “insurance”
to keep high inflation at bay. He added that if, later on, the interest rates were not needed, the BSP could easily roll back the rates.
The BSP governor said the central bank would face more difficulties if it did not raise interest rates when it was warranted. This, he said, would be more dangerous for the economy.
“I would rather na naghahabol tayo sa pag-ro-roll back kaysa naghahabol tayo umakyat. The moment na ‘pag nawalan ng tiwala ang tao, na inflation is normalizing, that’s a more difficult path to take,” Medalla said.
“I’m not worried about the monetary policy reducing output. What I’m worried about is, if we’re late, and there’d be a greater sacrifice of output later on,” he added.
Meanwhile, in the Financial Stability Coordination Council’s (FSCC) launch of the country’s 2022 Financial Stability Report (FSR), the governor noted the country’s continuing recovery from the disruptions caused by the pandemic.
He highlighted a strong growth and the improving employment figures. Yet he also underscored the need to be prepared for the challenges ahead.
“The supply and distribution of key commodities such as oil and food are still not where they were pre-pandemic. These bottlenecks would keep consumer prices high. The policy response of raising interest rates will eventually affect the demand side of economic activity. How these changing demand and supply patterns manifest in 2023 at the global stage remains to be seen,” Medalla said.
The interlinkages across commodities and across jurisdictions is the main story in the FSR. The discussion starts with macroeconomic issues that have an impact on financial markets.
He said “the current policy issues are systemic because of the interlinked cause-and-effect consequences they create.”
“This is why systemic risk analysis is particularly challenging. We need to scope the key connections among stakeholders, understand their interlinked behaviors, and only then assess how the economy is affected,” Medalla said.
“There is a lot of work done on granular data and newer methods of analysis that goes on behind the scenes. And all that is happening so that we minimize surprises in risks while we all live in the VUCA world,” he added.
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