BSP won’t act on inflation till there’s evidence of second-round effects

BANGKO Sentral ng Pilipinas (BSP) Governor Benjamin Diokno expressed confidence that the acceleration of prices in February are still supply-side in nature and will likely taper off in the coming months.

In his statement after the Philippine Statistics Authority (PSA) announced on Friday that inflation hit 4.7 percent, the governor said: “The projected upward trend in inflation is seen to be temporary, driven primarily by supply side factors.”

“The sources of near term inflation are supply side shocks in nature that should not require a monetary response unless they lead to second round effects,” Diokno told reporters.

The governor said these supply-side shocks are best addressed by “non-monetary interventions” that ease domestic supply constraints.

“The overall balance of risks to future inflation continues to lean toward the downside, owing mainly to the continued uncertainty caused by the pandemic on domestic and global economic activity. Meanwhile, upside risks could emanate from the possibility of an early roll out of Covid-19 vaccines in the Philippines,” he said.

ING Bank economist Nicholas Antonio Mapa also said that since inflation seems to be coming from a supply side constraint, the BSP is likely to keep all monetary policy levers unchanged until at least the third quarter of the year.

“BSP Governor quelled concerns about a possible policy rate hike in the near term, highlighting the supply-side nature of the recent surge in price…For the meantime, Diokno does appear confident that inflation will eventually taper off in the second half of the year once direct supply side remedies to food supply shortages take root.  We expect BSP to remain sidelined for 2021 while inflation will likely remain elevated in the near term before gradually decelerating by the third quarter,” Mapa said.

Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort, meanwhile, said that while the higher inflation does indicate a long pause on monetary policy movements for the year, rate cuts are still not off the table for 2021.

“For the coming weeks/months, any further monetary easing measures, especially any further cut in banks’ RRR, remain possible, especially if inflation stabilizes, as the economy needs all the support measures that it could get at this time largely due to the adverse economic effects of the Covid-19 lockdowns/pandemic, amid the lack of additional funding for more fiscal stimulus measures, thereby making more monetary easing measures possible to help improve prospects of economic recovery, going forward,” Ricafort said.

Mapa also said that Diokno did indicate that monetary authorities were on the lookout for signs of second-round effects, like wage or transport fare adjustments, and if the recent spike in prices could affect the inflation outlook over the policy horizon.

“The Monetary Board will consider carefully recent price developments that could influence the outlook for inflation along with evidence of second-round effects during the  monetary policy meeting on 25 March 2021,” Diokno said.

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