According to the Institute for Development and Econometric Analysis, Inc. (IDEA) latest Economic Trends, the BSP, through the Monetary Board, has been generally very cautious of the development in overseas markets in forming its monetary policy actions in 2011. They felt that the two concurrent events that the global economy would sustain its growth momentum in 2010, albeit a two-speed recovery where emerging and developing economies which includes the Philippines exhibit faster economic growth than developed economies, and geopolitical tensions in the MENA region create conditions for expanding inflationary expectations.
Per same published report, it was revealed that in May 2011, BSP has executed a follow-through increase in policy interest rates of 25 basis points immediately after taking tight policy actions in February 2011 by raising policy interest rates by 25 basis points. BSP reasoned that this was necessary to further anchor inflation expectations and weaken second-round effects after observing that headline inflation in April hit 4.5 percent from previous month’s 4.3 percent while core inflation in April registered 3.8 percent from previous month’s 3.5 percent. BSP was aware that although consensus forecasts showed elevated inflation, it was within the medium 4.0%±1.0% term target range. Nonetheless, the BSP doesn’t want to lay bets that the first round of monetary tightening was adequate to anchor inflation expectations. Policy interest rates were kept at 4.50 percent until January 2012.
Furthermore, it was reported by IDEA, that the National Statistics Office has already shifted to the 2006-based consumer price index series and will no longer release the 2000-based series. The government, through the Development Budget Coordination Committee in consultation with the BSP, however, preserved the inflation target for 2012 to 2014 at 4.0±1.0 percent. The BSP reported that the two series are not statistically different anyway and that the target is a desired range that should steer accordingly the public’s perception of future inflation. BSP’s approach to inflation targeting would be identical to what it did in 2011, i.e., to be mindful of current and emerging risks (both the upside and downside) to inflation expectations. Some risks in 2012 are somewhat similar to what we saw in 2011. Global economic recovery is seen to decelerate in 2012 as economic activities in developed economies are weakened by uncertainties in production and employment.
Overall, these uncertainties put a damp on global demand and from this international prices weaken. While this scenario could hold up accommodative monetary policy in the Philippines (recall BSP’s policy actions last month), the BSP is expected and will be vigilant as last year on possible upside risks to inflation expectations. There are two significant upside factors at the moment. One, in spite of the consequential spill over to emerging and developing economies of troubles in developed economies by restraining exports, emerging and developing economies still offers better return to investments; this continues to attract capital inflows (note its positive effect on domestic liquidity). Second, prolonged tensions in the MENA region offers threat to sustainability of ample supply of oil, hence global oil price could once again rise. Expect that the BSP will continue to optimize the potential of its monetary policy actions to effectively anchor inflation expectations, according to IDEA.
Editor’s Note: For comments, rejoinders and questions related to credit & collection, Mr. Ed F. Limtingco can be reached at elimtingco@yahoo.com.