Diokno sees more harm in raising rates ‘too early’

By Luz Wendy T. Noble, Reporter

AS SOME central banks around the world are beginning to raise rates, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno on Sunday said tightening monetary policy too early may cause more harm to the Philippine economy’s recovery.

“To me, the harm (of) tightening monetary policy too soon exceeds the harm of moving too late, given that the Philippine economy is at its nascent state of economic recovery,” he told reporters via Viber message.

Mr. Diokno said he believes the elevated inflation in the past months is still “transitory” and fueled mainly by low supply.

“Is inflation transitory or the beginning of a longer-term problem? Central bankers and policy makers are divided. But based on available evidence, I will side with Team Transitory,” he said.

While the BSP staff sees inflation exceeding the target at 4.5% this year, Mr. Diokno said inflation is expected to return to within the 2-4% range at 3.3% and 3.2% by 2022 and 2023.   

Mr. Diokno said factors that could cause faster inflation over the near term include the potential impact of typhoons, the persistent African Swine Fever outbreak, and higher world commodity prices due to supply chain disruptions.

“On the other hand, the main sources of downside risks are the prolonged impact of the domestic economic growth due to delays in the easing of lockdown measures and the weaker-than-expected global recovery owing to the rapid spread of the more infectious Delta variant,” the central bank chief said.

Mr. Diokno pointed out that since inflationary pressures are coming from the supply side, “there appears to be no justification for monetary intervention.”

“There is no pressure on the demand side, such as increases in wages, transport costs, and housing. There is sufficient slack in the economy and real estate prices are steady with downward bias,” he added. “For example, would an interest rate hike bring about higher world crude supply? Of course not.”

In September, inflation eased to 4.8% from 4.9% in August. Inflation has mostly exceeded the 2-4% target by the central bank, except in July when it settled at 4%.

The central bank in its September policy review kept rates steady, citing the need to support recovery even as it raised its inflation forecast for the year to 4.4%.

Mr. Diokno acknowledged that some central banks have already started to increase their interest rates due to rising inflation pressures.

“Based on the evidence at the time of its decision, the Monetary Board will decide on the appropriate timing of its policy change. It won’t be influenced by opinion makers, market analysts or Twitters,” Mr. Diokno said.

The Bank of Korea and New Zealand have already raised interest rates, while the Monetary Authority of Singapore tightened monetary policy by raising the slope of its currency band.

The International Monetary Fund on Friday urged central banks to vigilantly watch out price dynamics and to look through whether inflationary pressures are “transitory.”

For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion, some factors have shown that the elevated inflation could still be “transitory.”

He noted food prices usually spike after a typhoon, but typically normalizes after some time.

Mr. Asuncion said the current rise in oil prices can be attributed to both supply chain issues and higher demand as the economy reopens.

On the other hand, he said that core inflation remains steady, noting this is an indicator of long-term inflation trend. The core inflation stood at 3.3% in September, unchanged from its August print.

“I actually agree at this point that it’s too early to raise interest rates. Domestic demand is still not strong although it’s starting to improve. We should wait for real economic growth to return before such policy move,” he said in a Viber message, noting economic recovery across the world is diverging.

Meanwhile, some analysts said the faster increase in consumer prices also reflect some signs of pickup in demand due to uneven global recovery.

John Paolo R. Rivera, an economist at the Asian Institute of Management, said the BSP is faced with a tough balance to keep inflation stable while nurturing growth.

With the key policy rate at 2% and inflation at 4.8% in September, the country is experiencing a negative real interest environment.

“People’s purchasing power and already low income are being eaten up by inflation. It cannot keep up with the growth of purchasing power through interest (that) people earn in financial institutions with the value of the money they lose due to inflation,” he said in a Viber message.

Mr. Rivera warned high inflation caused by low supply will also coincide with increased consumer demand ahead of the holiday season.

However, Mr. Rivera acknowledged the BSP’s bias to keep its support for economic recovery. The economy rose by 11.8% year on year in the April to June period, but shrank 1.3% quarter on quarter.

“The problem with increasing interest rates is its consequence of contracting gross domestic product (GDP),” he said.

Third-quarter GDP data will be released on Nov. 9. The Monetary Board will have two more policy reviews this year set on Nov. 18 and Dec. 16.