Space for accommodative policy narrowing, Diokno says: BSP set to begin tightening cycle

BANGKO SENTRAL ng Pilipinas (BSP) Governor Benjamin E. Diokno on Wednesday said the space for keeping an accommodative policy is shrinking, amid rising inflation risks and the economy’s return to pre-pandemic level in the first quarter.

“The space for maintaining an accommodative policy stance has considerably narrowed given how the April 2022 inflation of 4.9% settled near the higher end of the BSP’s forecast range of 4.2% to 5% [for the month],” he said at an online briefing.

Mr. Diokno said the better-than-expected 8.3% gross domestic product (GDP) growth in the first quarter, and ongoing downside risks “strengthen the case for a withdrawal of monetary policy accommodation.”

“While the BSP stands ready to deal with these risks to inflation and economic growth, any adjustments in the monetary policy stance will be done in a timely manner so as not to disrupt the growth momentum while preventing price pressures from becoming entrenched,” he said.

The BSP chief’s more hawkish signals on policy came a day before the third rate-setting meeting of the Monetary Board for the year.

Eight out of 17 analysts in a BusinessWorld poll last week expect the central bank to begin its  tightening cycle by raising interest rates by 25 basis points (bps) today in order to address rising inflationary pressures.

A rate hike on Thursday will be the BSP’s first since 2018.

Mr. Diokno said second-round effects are “starting to manifest.”

The recent approval of wage hikes in the National Capital Region and Western Visayas may signal further increases in other regions. Wage petitions have been put on hold since the pandemic began in 2020.

The Labor department said the recently approved wage hikes in Metro Manila and Western Visayas will take effect on June 3.

Inflation in recent months quickened mainly due to the impact of the war in Ukraine on oil and other commodity prices. Gasoline, diesel, and kerosene prices have increased by P21.60, P31.40, and P27.65 per liter since the start of the year.

“With energy and transport-related items directly accounting for about 14% of the consumer price index basket, a sustained increase in domestic oil prices may result in a disanchoring of inflation expectations,” Mr. Diokno said.

Mr. Diokno said supply issues continue to be the main factor behind faster inflation in recent months, which he said is still best addressed by interventions from the National Government.

“Fiscal authorities will need to support the most vulnerable sectors, to help offset rising living costs,” he said.  “Monetary authorities will need to carefully monitor the pass-through of rising international prices to domestic inflation, to calibrate appropriate responses.”

At its previous policy review in March, the BSP raised its inflation forecast to 4.3% and 3.6% for 2022 and 2023, respectively.

“Upside risks [for inflation] over the near term continue to emanate from the shortage in domestic food supply as well as from the potential impact of higher oil prices on transport fares,” he said. 

The BSP slashed interest rates by a cumulative 200 basis points in 2020 to help revive an economy that had plunged into recession due to prolonged and stringent coronavirus disease 2019 (COVID-19) lockdowns.

It has kept rates at a record low of 2% since November 2020. — L.W.T. Noble with inputs from Reuters