Inflation uptick in Jan. will not lead to policy response – BSP

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the expected rising inflation – mainly temporary and are coming from supply-side pressures — does not warrant a monetary policy response, at least not yet.

 “The projected uptrend in inflation is seen to be temporary,” said Diokno, adding that the “sources of near-term inflation pressures are supply-side shocks in nature that should not require a monetary policy response unless they lead to further second-round effects.”

 “At the same time, supply-side shocks are best addressed by non-monetary interventions that ease domestic supply constraints. Currently, direct measures are being pursued by the National Government to enhance the availability of affected commodities,” he said.

The inflation rate in January of 4.2 percent breached the government’s two-four percent target, and it is also higher than December’s 3.5 percent. It also broke the BSP’s own forecast range for the month of 3.2 to 4.1 percent. The central bank had a point inflation forecast of 3.7 percent for January.

The Monetary Board is set to meet on February 11 for its first policy meeting for 2021. Last year, the Monetary Board reduced the benchmark rate by 200 basis points to a flat two percent. 

Diokno said the Monetary Board which he chairs, will review and consider the latest price developments in the global commodity markets and the fourth quarter 2020 GDP which shrank by 8.3 percent year-on-year, and the end-year GDP results which was a contraction of 9.5 percent.

Despite the higher-than-projected January inflation, the BSP remains confident that inflation is consistent with its prevailing assessment of a transitory inflation uptick in the first half of 2021 which is “largely supply-side pressures related to the African Swine Fever (ASF), weather-related disturbances, higher global oil prices, along with positive base effects.”

 “(The) average inflation is still seen to settle within the two-four percent target range over the policy horizon,” said Diokno. The BSP’s latest inflation forecast for 2021 is 3.2 percent and 2.9 percent for 2022.

It is unusual when the BSP did not correctly set a forecast range in a monthly inflation projection, and it is rare when it misses.

Last week, Diokno said the BSP is making some changes in the way it projects macroeconomic outlook based on the International Monetary Fund’s forecasting and policy analysis systems, to generate more on-point inflation forecasts and other macroeconomic variables for its surveillance activities.

Diokno said all BSP surveillance systems including those in development, are not conducted in isolation from other economic and financial market analytics. “These are intended to be integrated in the work and process of policy formulation. These tools will be particularly useful in strengthening policies that enhance key macroeconomic buffers and shield the economy from future shocks,” he has said.

The BSP has adopted the inflation-targeting approach in 2002 for its primary mandate of price stability. With the COVID-19 pandemic requiring other metrics, the BSP continues to develop forecasting models in the formulation of BSP’s monetary policy decisions which are forward-looking and data-driven.