Home Editors' Picks BSP ready for preemptive action to tame inflation risks — Diokno

BSP ready for preemptive action to tame inflation risks — Diokno

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno gives a speech at the Philippine Economic Briefing at the Philippine International Convention Center, Pasay City, April 5. — PHILIPPINE STAR/ GEREMY PINTOLO

By Luz Wendy T. Noble, Reporter

THE PHILIPPINE central bank is ready to take preemptive action if inflation expectations are at risk of being “disanchored,” its governor said on Tuesday.

“We are prepared to take preemptive action as needed if inflation expectations become at risk or disanchored,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said at the Philippine Economic Briefing held in Pasay City on Tuesday.

He said they continue to be patient and will consider a rate hike adjustment by the second half of 2022.

Mr. Diokno said March consumer price index (CPI) data suggest that inflation will likely be elevated in the coming months.

Inflation jumped to 4% in March, near the upper end of the BSP’s projected range of 3.3-4.1% for the month and still within the 2-4% target band for the year.

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

In March, the BSP kept rates at record lows as it cited the need to keep supporting the economy at a time of increased uncertainties to the growth and inflation outlook. At the same time, it acknowledged that economic recovery has already gained traction.

The Monetary Board now expects inflation to breach the target at 4.3% for 2022 from 3.7% previously, citing the surge in oil and commodity prices due to the Russia-Ukraine war.

“Now, on the timing of the disengagement strategy, I think we are still on track despite the Russia-Ukraine crisis. We’re still looking at the second half of the year for our normalization [of rates] strategy,” he said.

Mr. Diokno said their eventual normalization of policy setting will be supported by firmer signs of a “durable economic recovery.”

The key policy rate is currently at a record low of 2%, and Mr. Diokno has earlier said this could reach 2.75% by 2023.

For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion, a preemptive rate hike from the central bank could do “more good than harm.”

“I believe that it would be good for monetary policy to anticipate right away and hike rates, albeit gradually, to help tame the actual rise in prices,” Mr. Asuncion said in a Viber message.

Meanwhile, Security Bank Corp. Chief Economist Robert Dan J. Roces said non-monetary policy measures like fuel subsidies and wider food imports are crucial to respond to inflationary pressures.

“However, we think the BSP may also be standing ready to raise the benchmark rate earlier than planned as a form of preemptive strike to further moderate inflation should price pressures start to become too compelling to ignore,” he said.

The Monetary Board will have its next policy review on May 19. Its first policy-setting meeting in the second half is on June 23.

Meanwhile, Mr. Diokno said they have extended another P300-billion zero-interest loan to the National Government.

“They recently renewed it and it will be paid by June 12. So, by the time the new administration takes over, there will be no more advances from the central bank,” he said.

A decision on future direct advances will be made by the next administration.

This is the sixth time the BSP extended direct advances to the National Government since the pandemic. It is lower than the P540 billion which was extended thrice in 2021, reflecting the gradual withdrawal of the BSP’s budgetary support to the National Government.

Under Republic Act (RA) No. 11494 or the Bayanihan to Recover as One Act, the BSP is allowed to lend the National Government an equivalent of 30% of its average revenue or P850 billion. This is higher than the cap set at 20% of its average annual revenue provided by RA 7653 or The New Central Bank Act.

Mr. Diokno also said they have significantly reduced their purchase of government securities.

“It’s been declining significantly. Right now, we almost don’t trade anymore. There are days when we don’t buy it,” he told reporters in mixed Filipino and English.