BSP Governor Benjamin Diokno
MANILA – Monetary officials are optimistic of within-target inflation this year despite the higher-than-target print in 2021 as well as the number of upside risks that include supply-side pressures and higher global commodity prices.
In an Open Letter to the President dated January 18 and a copy of which was released to journalists on Tuesday, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno attributed the elevated inflation last year to constraints on key food items like pork as well as increasing oil and energy prices.
The average inflation last year stood at 4.5 percent.
“The continued and effective implementation of direct non-monetary interventions and policy reforms to alleviate supply constraints remains crucial in keeping the trajectory of inflation within the target band, particularly as risks to the inflation outlook appear to be slightly on the upside for 2022,” Diokno said.
However, he said these risks are expected to be countered by the spread of new Covid-19 (coronavirus disease 2019) variants, which could delay the further easing of remaining containment measures as well as dampen the outlook for global and domestic economic growth.
Diokno said that while monetary authorities expect inflation to continue to decelerate to within-target levels, “the inflation outlook, however, is subject to considerable level of uncertainty given developments relating to the Covid-19 pandemic, which could affect domestic and external economic conditions going forward.”
“Nevertheless, we would like to assure the President and the Filipino people that the BSP is closely monitoring developments and challenges brought about by the pandemic to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” he said.
The BSP issues an Open Letter to the President whenever inflation breaches the target band set by economic managers.
According to the BSP website, this practice is aimed “to ensure accountability in cases where the BSP fails to achieve (the) inflation target.”
Previous Open Letters to the President were issued in 2004, 2005, 2006, 2007, 2008, 2009, 2016, 2017, and 2019.
Diokno said the inflation target is determined and announced by the inter-agency Development Budget Coordination Committee (DBCC) at least two years ahead of the target period.
For 2022-2024, the inflation target was set between 2 to 4 percent.
Diokno said food supply constraints such as on pork due to the African swine fever (ASF) that started in Asia in 2018, along with “existing regulatory, tariff, and technology constraints in the livestock and feed sector”, are among the factors that drove the elevated inflation rate last year.
Another factor is the increase in global oil prices after the recovery of global demand following a decline when the pandemic started in 2020 and of restrained supply, he said.
Diokno said these factors were partly offset by the negative base effects of higher transport fares in 2020, particularly of tricycle fares, when the government implemented movement restrictions.
He said while supply-side pressures rose, “demand-side pressures on inflation appear to be limited as evident in stable core inflation numbers, supporting the assessment that inflation had been mostly supply driven.”
He added core inflation, which excludes volatile food and oil items, is generally manageable in 2021 and posted an average of 3.3 percent year-on-year and little changed from 3.2 percent in 2020.
Diokno said monetary authorities kept the central bank’s key policy rates steady after slashing this off by 200 basis points in 2020 as upticks in domestic inflation rate have been caused by supply-side factors.
To date, the BSP’s overnight reverse repurchase (RRP) is at record-low of 2 percent.
Diokno said “the BSP tends to look through the initial impact of supply shocks because monetary policy has a limited impact on cost-push forces.”
He said the central bank supports the implementation of non-monetary interventions and reforms to alleviate supply-side constraints.
He added their inflation forecasts “indicate a reversion towards the target range in 2022 and 2023, suggesting a manageable inflation outlook.”
Diokno said “inflation expectations have also remained firmly anchored to the target band, based on the BSP's surveys of private sector economists and analysts.”
“Given these considerations and significant downside risks to domestic economic growth amid the lingering threat of new Covid-19 variants and infections, the BSP has maintained an accommodative monetary policy stance to support the recovery of the economy while looking out for potential threats to price stability,” he added. (PNA)
