BSP sees no need for rate change despite second round of inflation

Despite the push from the International Monetary Fund (IMF), the Bangko Sentral ng Pilipinas (BSP) said it still sees no second-round inflationary pressures unless wages and transport fares are adjusted.

The Monetary Board is scheduled to meet on April 7 to discuss monetary policy in the wake of the latest round of increase in US interest rates accompanied by signals from the US central bank that it saw inflationary pressures moving forward.

According to BSP Assistant Governor Diwa Guinigundo, however, the BSP still has not seen clear enough signs that second-round inflationary pressures have begun to have an impact on the demand-side to indicate the need to take monetary action.

Although the IMF supported the BSP’s wait-and see stance, the fund admitted in its latest executive report that it’s directors were divided on how to read the movements in the country’s inflation rate.

The IMF reported that some of its directors believed no policy action was warranted at this time while the rest believed that the MB should have acted as early as December.

According to Guinigundo, however, the IMF’s apprehensions were based mainly on the increase in the core inflation rate, an indicator that excludes the seasonal and supply-side impact on domestic prices.

"There was an increase in the core inflation but upon closer look, you can see that it still came from administrative failure and not due to demand-side pressures," he explained.

In 2004, Guinigundo explained, the importation of corn for feedstock was not timed appropriately, creating an artificial shortage that led to the surge in the prices of livestock.

The MB bases part of its decision on the recommendation of the BSP’s Department of Economic Research (DER), headed by Guinigundo, which constantly monitors macro-economic indicators.

Despite the pressures, however, Guinigundo said the most telling indicator of demand-side pressure would be adjustments in wages and/or adjustments in transport fares.

"As far as we know, there are no petitions for wage increases or transport fares," he said. "I think the labor sector realizes that if they ask for wage adjustment, they will end up losing to the resulting inflation."

According to Guinigundo, a three-percent adjustment in wages would only be gobbled up by six-percent inflation. "They’d end up three percentage points behind," he said. "In the end, the labor sector is always on the losing end, especially since minimum wages can only be adjusted once a year."