MANILA, Philippines — Monetary authorities allayed fears inflation is bound to get out of hand in the coming months, continuing to expect expensive food prices to moderate on their own and requiring no pullback of massive liquidity injected to a weakening economy.
“I would not say that inflation would be an overriding concern at this point. The uptick that we are seeing is emanating from temporary supply side considerations,” central bank Deputy Governor Francisco Dakila Jr. said in an online briefing on Thursday.
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“That really is the basis for saying that we have ample room to keep the overall stance of monetary policy accommodative,” he said.
In fact, Dakila said the Bangko Sentral ng Pilipinas (BSP) even sees a “downside risk” to consumer prices, suggesting that its 3.2% average forecast for the year may in fact end up lower by yearend.
Dakila’s stance echoed BSP’s position since November that qualified rising food prices, particularly of vegetables and meat, as “transitory” and therefore no longer need to be addressed by withdrawing some of the P2 trillion in cash released to the financial system last year.
As it is, BSP Director Zeno Ronald Abenoja said monetary policy, or the control of flow of money in the economy, would not help in resolving “supply shocks,” which in this case, emanate from low vegetable harvests due to crop damage and the African swine flu that hit hogs.
Indeed, the ball is on the government’s court, and the Duterte administration had moved swiftly to allow more pork imports to partly bridge the gap of 4 million metric tons in supply, as well as instructing provinces left unscathed by typhoons to deliver harvests to Metro Manila. A Senate investigation on rising prices is also being eyed.
But as much as BSP’s primary mission is to keep prices stable, withdrawing money released through rate and reserve cuts last year while demand is weak would not be the way to go. Dakila emphasized that “when the recovery starts, then the liquidity…will be there and we expect that this is going to be absorbed by the economy.”
It was a signal that any reversal from 200 basis-point cut in reserves and rates last year would not happen any soon. But Dakila also added that the impact of last year’s typhoon damage to crops, and therefore supply, may continue to trickle down as inflation above 3% during the entire first half.
BSP targets inflation between 2-4% this year. Last year, consumer prices rose an average 2.5% year-on-year.
“But later on, inflation could drop below the midpoint of the target at the last half of the year driven this time by base effects,” he explained. This is expected to persist until 2022, when inflation is seen averaging 2.9% on-year.
Still pays to watch out
That said, inflation is still ticking up and BSP officials, while already noticing an uptrend last November, still delivered a final rate cut supposedly to support the economy. BSP officials said that last easing, which added money to the system, was unlikely to have contributed to elevated prices now.
“It would have happened whether or not we made the policy adjustment,” Dakila said.
BSP Director Dennis Lapid agreed. “The BSP took the approach of most central bank in view of ongoing pandemic. I think that is part of all whatever it takes approach that was adopted by most central banks,” he said in the same briefing.
But for Cielito Habito, economist at Ateneo de Manila University, it still pays for the central bank “to keep its eye on the ball” so that inflation would not risk hampering pandemic recovery, similar with delays in vaccine rollout.
Ateneo projects inflation to be somewhere between 3-4% this year, while gross domestic product is projected to inch up 2.9% for 2021.
“Money supply is at record high and ironically, as we return to normal activities and the velocity of money normalizes, the more inflationary our high money supply would be,” Habito said in a separate briefing.