Higher-than-expected wage hikes may stoke prices, keep rates high
HIGHER-THAN-EXPECTED minimum wage increases could spur prices to spiral out of control and prompt the central bank to keep rates tighter for longer, according to analysts.
“Although raising the minimum wage might boost household spending via higher real disposable income, such a hike would not be ideal from a price stability view,” Oxford Economics economist Makoto Tsuchiya said in an e-mail.
“Higher wages could potentially raise inflation expectations, which might start a wage-price spiral, requiring the central bank to keep rates higher for longer,” he added.
Lawmakers are seeking acrossthe-board minimum wage hikes for workers in the private sector.
The Senate last week approved on second reading a bill that seeks an across-the-board wage increase of P100. The House of Representatives said it is studying a proposal to increase wages by P350 to P400.
Bangko Sentral ng Pilipinas (BSP) Senior Assistant Governor
Iluminada T. Sicat earlier said the central bank’s baseline inflation projections did not take these into account.
In June, the National Capital Region Tripartite Wages and Productivity Board approved a P40 increase in the daily minimum wage for Metro Manila.
“To the extent the assumed increase in minimum wage is beyond what we have incorporated in the baseline, and if you notice, it’s not part of the risk adjustments we presented, this could pose a threat to the inflation outlook,” Ms. Sicat told a news briefing last week.
BSP’s baseline inflation forecast for this year is 3.6% and 3.2% for next year. Inflation may average 3.9% and 3.5% this year and next year if the risks materialize.
Inflation eased to 2.8% in January from 3.9% in December, the second straight month it fell within the central bank’s 2-4% target.
“In the absence of wage hikes, subsiding inflationary pressures and softer economic activity should lead the bank to ease monetary policy as soon as the second quarter in our view,” Mr. Tsuchiya said. “A minimum wage hike would jeopardize this process.”
Congressmen in November approved on third and final reading a bill that would allow the government to tap excess funds of government-owned and -controlled corporations (GOCC) in funding unprogrammed budgets.
Finance Secretary Ralph G. Recto said last week the government might have to adjust its fiscal targets for the year to be “more realistic.”
Economic managers are targeting 6.5% to 7.5% GDP growth this year under the Development Budget Coordination Committee’s (DBCC) latest macroeconomic assumptions.
It also projects a growth target of as much as 8% in 2028 under its medium-term fiscal and growth goals. Philippine economic growth slowed to 5.6% last year, falling short of the state’s 6-7% goal.
Mr. Recto said DBCC’s entire medium-term fiscal framework is under review. “The fiscal plan was made when (Mr. Marcos) became president in 2022,” he told reporters. “There was no war in the Middle East, the Ukraine war had just begun. Thereafter, prices of food and oil rose.”
Former Finance Secretary Margarito B. Teves in an interview last week said the government should revisit its economic growth targets “to have more conservative assumptions.”
“We have to really go back to the assumptions that brought about the target of the government,” Mr. Teves separately told BusinessWorld on the sidelines of the hearing.
Raul V. Fabella, a retired professor from the University of the Philippines School of Economics, said the government might miss its fiscal goals this year due to El Niño.
“We might not meet the target because of the many issues,” he told reporters last week. “We have El Nino, floods in Mindanao, a dry spell in Negros, etc.”
The economy shrank by 0.5% in 1998, when the country experienced the worst El Niño dry spell in history.
Economic managers expect that the National Government’s budget deficit to hit P1.39 trillion this year, or 5.1% of GDP.
Under its fiscal framework, revenues are expected to account for 15% to 16% of GDP, while expenditures will be about 20%.
“Overall, especially in view of the prospect of lower Fed rates, I think this year will be better for growth,” Mr. Salceda said.