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Amid rising inflation, BSP chief set on H2 timeline

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno recognizes the “need to take action” in terms of monetary policy, as inflation is projected to spike further in the coming months.

However, the governor confirmed on Tuesday that they’re still looking at staying the course of starting monetary policy normalization only in the second half of the year.

In the press conference after the 2022 Philippine Economic Briefing, the governor said inflation will likely remain elevated in the coming months after clocking in at 4 percent in March from 3 percent in the previous month.

“In the latest policy meeting, the latest assessment is that keeping the policy rate at this level was appropriate. However, the latest inflation number this March at 4 percent suggests that inflation is likely to remain elevated in the coming months,” the governor said.

“This means that the BSP must be prepared to take action against price pressures from broadening and becoming more entrenched, which could translate to second-round effects,” he added.

Earlier during the day, the Philippine Statistics Authority (PSA) announced that the growth of consumer prices hit the ceiling of the government’s annual target range of 2 to 4 percent in March on the back of higher price increases of food items combined with the continued rise in energy-related inflation.

The governor said they will continue to keep a “watchful eye” on emerging developments to ensure that the monetary policy stance remains in line with price stability.

“We’re prepared to take preemptive action as needed if inflation expectations become at risk of becoming disanchored. At the same time, firmer signs of a durable economic recovery will allow us to consider adjustments in our monetary policy stance consistent with the eventual normalization of our policy settings,” the governor said.

Normalization in H2

Despite the more hawkish tones of the governor on Tuesday, Diokno said they are still looking to start policy normalization in the second half of the year, as earlier planned.

“For the timing of the disengagement strategy, I think we are still on track despite the Russia-Ukraine crisis. We are still looking at the second half of the year for our normalization strategy,” the governor said.

Diokno said the BSP will continue to assess demand and supply conditions to ensure the “timely and orderly” implementation of their exit strategy.

“We will strive to strike the right balance between providing support to the economy on one hand and fulfilling our mandates of price and financial stability on the other,” the governor said.

With the surge of inflation in March, economists are agreeing with the governor that prices are only bound to go upwards in the coming months.

“Inflation could pick up to 4 percent levels for the coming months of 2022, largely due to the increase in global oil, energy and other commodity prices since Russia’s war with Ukraine,” Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said.

“[The] relatively weaker peso exchange rate vs. the US dollar in recent months could still also add to import costs,” he added.

Bank of the Philippine Islands (BPI) economists also said the peak for inflation during the year is “not yet in sight” as oil—the biggest contributor to faster inflation—is also affecting food and utility prices.

In a research analysis published after the inflation announcement on Tuesday, BPI said aside from the usual culprit of oil, food and utilities, supply issues from China’s lockdown and the normalization in the US can also feed into the local inflation in the coming months.

For BPI, they expect a 75-basis-point adjustment in the policy rate this year from 2 percent to 2.75 percent.

“The chances of an intermeeting/unscheduled BSP rate hike are increasing because of oil and currency volatility. Kicking the can further may eventually lead to a situation that could force the BSP to hike by more than 25 basis points in one meeting, similar to what happened in 2018,” the BPI said.

“It is a tough and delicate balancing act in managing the monetary policy, going forward, to prevent inflation from spiraling further, while at the same time, helping sustain the fragile economic recovery prospects still reeling from the adverse effects of the pandemic that could be jeopardized by any premature tightening of monetary policy,” Ricafort, meanwhile, said.

The BSP has two more scheduled monetary policy meetings for the first half of the year—on May 19 and June 23. The first meeting the BSP is scheduled to have in the second half of 2022 is on August 18.

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