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By Maricel E. Burgonio, Reporter
THE Bangko Sentral ng Pilipinas (BSP) has been
in a lot of heat in recent months over its response to the surge in
prices.
In just a year, the country’s inflation rate
has risen by nearly five-folds to a 14-year high last month,
removing a key pillar of the country’s recent economic success.
The average increase in June prices accelerated to 11.4 percent from
only 2.3 percent last year.
As a result, the BSP is widely expected to raise
its key interest rates by at least another 25 basis points later
this week. This would increase its overnight borrowing and lending
rates from the current 5.25 percent and 7.25 percent, thus taking
away a second pillar of the government’s so-called strong
macroeconomic fundamentals.
High-interest rates are a recipe for cooling
down an economy. Indeed, the government has since trimmed its growth
forecast for this year from last year’s three-decade high of 7.3
percent. Analysts said the central bank, whose primary mandate is
price stability, was too slow in acting against inflation, thus
risking a slowdown.
Leading the charge was the International
Monetary Fund (IMF), which sounded the alarm that the Philippines,
along with Vietnam and Indonesia, may be behind the curve in terms
of monetary tightening, especially with runaway inflation rearing
its ugly head across the globe.
During the latest Asia-Europe finance ministers
meeting, Takatoshi Kato, IMF deputy managing director, said growing
inflation risks are an immediate concern in most emerging economies
where the real interest rates are low or have become fairly
negative.
To be sure, the BSP began talking tough on
inflation only in June, when it raised its key policy rates by 25
basis points on the heels of a government announcement that the
average price increase had risen to a nine-year high of 9.4 percent
in May.
This was the first time since October 2005 that
the BSP raised its key policy rates. Along with its tightening, the
Monetary Board admitted that a number of indicators pointed to
supply-driven pressures feeding into demand.
As late as January 31 this year, the BSP was
cutting interest rates, in step with similar monetary loosening by
its US counterpart, the Federal Reserve Board. Back then, the major
policy challenge supposedly was how to respond to a slowing US,
which is the Philippines’ largest export market.
But for the next four months, the BSP took a
wait-and-see attitude. It said it had expected slower economic
activity in the US as well as globally to moderate price pressures
coming from imported oil and food.
However, Dubai crude climbed to more than $140
per barrel, resulting in higher transport fares and wages, which are
precisely the second round effects of inflation. Public utility
fares will again rise starting Monday, causing the BSP to issue a
warning last week that it may have to revisit its inflation forecast
for this year.
Besides high oil prices, a stronger dollar and
growing risk aversion have weakened the peso against the greenback.
“With inflation continuing to surprise
on the upside and inflation expectations rising faster than
expected, we now judge that more monetary tightening will be needed
to stabilize inflation expectations, raise real interest rates and
halt [the] peso’s decline,” Edward Teather, UBS Securities
economist, said.
Core inflation, according to some analysts, was
also increasing faster than the BSP had acknowledged. Core inflation
shot up to 4.8 percent in March, 5.9 percent in April, 6.2 percent
in May and 6.6 percent in June.
Core inflation measures the change in average
consumer prices excluding specific food and energy items. As such,
it may be viewed as a measure of long-term price trends. Core
inflation is usually affected by the amount of money in the economy,
relative to production— in short, by monetary policy, which is
within the BSP’s purview.
“The BSP delayed taking action on the view
that renewed inflation was driven primarily by transitory
supply-side sectors, but note that the run up in core inflation to
6.2 percent in May 2008 from 2.6 percent a year earlier mean[t] that
inflationary pressures were spreading,” the Institute of
International Finance (IIF) said.
The BSP’s reluctance to raise interest rates
also reflected success in controlling growth in liquidity, the IIF
said. The BSP had encouraged banks, state pension funds, and
government corporations to deposit funds directly to its special
deposit accounts. Demand for money had slowed from the double-digit
levels of last year, which at one point hit 26.1 percent.
Despite this success, tighter monetary policy is
unlikely to reverse the downward bias on the country’s balance of
payments (BOP) surplus over the near term, the IIF said.
The BSP recently cut its BOP surplus forecast
this year to $2.5 billion from $3.4 billion.
While far from the deficits of the past, this
year’s forecast is significantly lower than the record high of
$8.6 billion surplus last year.
The surge in prices also has prompted the
government to abandon its plan to balance its budget this year, as
it announced increases in public spending on subsidies for the poor.
The Finance department forecast a revenue shortfall of as much as
P75 billion this year, a big jump from last year’s P12 billion.
During his official visit to New York with
President Arroyo, BSP Gov. Amando Tetangco Jr. had said investors
were not singling out the Philippines when they raised the issue of
Asia lagging behind the curve in terms of monetary response to
surging inflation.
True, the Philippines’ 5.25 percent overnight
borrowing rate at the time was already higher than those of Malaysia
at 3.50 percent or Thailand at 3.25 percent—both of which had
acted earlier than the BSP against inflation.
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