BSP’s ‘mission creep’
The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the economy.” Thus says the law which officially created the Bangko Sentral ng Pilipinas 25 years ago this week. Tuesday also marks the first year in office of BSP Governor Nestor Espenilla Jr., who was appointed by President Duterte after a prolonged period of intense lobbying by personalities eager to take the helm of the country’s single most influential government economic agency.
And while the institution and its top brass have performed admirably for most of its quarter of a century of existence, the last few months appear to be fast becoming a blot on the BSP’s track record. That’s because prices of basic goods and services in the country have spiraled out of control, accelerating to their fastest pace in at least five years.
For sure, a substantial portion the 4.6-percent inflation rate plaguing the country today is beyond the BSP’s control. World crude oil prices have spiked upward, translating to higher pump prices locally. The tight supply of rice and other agricultural commodities aggravated the situation, and all these were yet amplified by a broad tax increase imposed by the Duterte administration early this year.
But, contrary to the central bank’s claims of powerlessness to stop these so-called “supply side” inflationary pressures, there was something it could and should have done.
Everyone knew as early as two years ago that global interest rates were on the rise and that these ensuing capital outflows would cause the peso to depreciate. A weakening peso makes inflation worse. The BSP could have tightened monetary policy at this point to slow the local currency’s decline and, thus, mitigate inflation.
Everyone also knew as early as last year that the Duterte administration was working to pass a tax hike package. Again, the central bank could have acted preemptively by hiking interest rates to dampen what it calls “second round” inflationary effects.
Instead, the BSP seems to have sat on its hands. Espenilla would often repeat that policymakers should keep their collective foot pressed down on the proverbial gas pedal to allow the Philippines to catch up with much-needed growth. But promoting growth is not the BSP’s main mandate. Fighting inflation is. Promoting growth is the job of the administration, from which the central bank is supposed to be independent.
Even Sen. Grace Poe has called for the BSP to exercise its independence and leave political considerations out of its decisionmaking process.
Generals call this phenomenon “mission creep”: the gradual shift in objectives during the course of a military campaign, often resulting in an unplanned long-term commitment, often with disastrous outcomes.
Perhaps just as problematic is the central bank’s dysfunctional system of communicating its policy intentions to its stakeholders. While Espenilla tends to adopt a hawkish tone in his statements, the central bank’s second highest ranking official, Deputy Governor Diwa Guinigundo, often adopts a dovish stance. The result is confusion in financial markets that have long been accustomed to crystal-clear messaging from the monetary regulator.
Thus, observers can’t be blamed for thinking that, in terms of performing its primary mandate, the central bank appears to have dropped the ball. And because of this, Filipinos are going through difficult times more than they should, no thanks to the diminishing value of their savings and the erosion of what spending power they have left.
The institution must get its act together to respond more forcefully against the current inflation, and, perhaps more importantly, act with more decisiveness—and independence—to prevent that inflation from escalating further.