BSP sees benign inflation ahead

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the inflation outlook of the BSP is still benign, fueling speculations that the Monetary Board (MB) would ease its policy settings when it meets tomorrow.

Tetangco told reporters yesterday that even with price of oil edging closer to $100 per barrel in the world market, the country’s inflation outlook has not changed.

According to Tetangco, this was partly due to the strength of the peso against the dollar, the weakness of the dollar itself and the broad stability in domestic food supply.

The Monetary Board held its advisory meeting yesterday in preparation for the policy meeting on Thursday.

Tetangco kept mum on what the Monetary Board was likely to do at its policy meeting but admitted that low interest rates would encourage business to take advantage of the opportunity to expand.

“Although banks have access to other sources of funds, low interest rates will still create a demand for loans and eventually we will see an increase in bank lending,” Tetangco said.

The BSP, however, still has to grapple with the effects of robust foreign exchange inflows and the resulting increase in domestic money supply.

According to prominent economist Romeo Bernardo, central bankers were learning that as long as financial capital could freely flow in and out of a country, the BSP could not hope to simultaneously control that country’s exchange rate and money supply.

“With strong inflows into the economy, particularly in the form of overseas Filipino workers’ (OFWs) remittances and foreign investments, the BSP has been grappling with the problem of how to keep the peso from excessive strengthening,”

According to Bernardo, there was strong pressure to curb peso appreciation given the impact on dollar earners such as OFWs and small- and medium-sized exporters.

“Mopping up excess liquidity in the financial system, however, eventually requires tighter monetary policy and higher interest rates,” Bernardo said. “This in turn leads to further peso appreciation.”

In order to tame upside pressures on the peso, Bernardo said the central bank has been using its surplus dollars to prepay foreign debt and has changed its financing mix towards domestic financing.

While turning to the domestic market for funding means lesser inflow of dollars, it also implies competition for local funds and an increase in local borrowing rates.

Again, the uptick in interest rates would mean more attractive domestic assets and a possibly stronger peso.

“Thursday will be another day of reckoning for the BSP, and monetary authorities will again have to heed (the theory) that trying to keep the value of the domestic currency stable against an anchor currency means following that foreign government’s policy rates wherever it goes,” Bernardo said.