MAINTAINING PRICE STABILITY IN THE PHILIPPINES THROUGH INFLATION TARGETING

The year 2019 marks the 70th year of central banking in the Philippines. It also highlights the many years of Bangko Sentral ng Pilipinas’ (BSP) quest of fulfilling its primary mandate of maintaining price stability conducive to a balanced and sustainable growth of the economy. While the price stability objective was already embedded in the provisions of the New Central Bank Act of 1993, the BSP only shifted formally to an Inflation Targeting (IT) framework 16 years ago. Looking back, it is during the IT regime that the BSP recorded considerable success in bringing inflation rates lower and keeping inflation expectations well anchored. Consequently, this allowed the BSP to build its credibility through greater accountability and transparency.

What is Inflation Targeting framework? It is a monetary policy framework that focuses on achieving price stability as the primary objective. With IT, the BSP publicly announces a headline inflation target which it promises to achieve over a certain period. The achievement of the goal is measured by comparing the actual headline inflation with the publicly announced inflation target.

The BSP formally adopted IT on January 24, 2000 to better achieve the BSP’s primary mandate. The key advantage of IT is its relative simplicity which allows the public to understand how the BSP works. It is also a comprehensive approach to policy making which takes into consideration the widest set of available information about the economy. It is forward-looking and recognizes that monetary policy actions affect inflation with a lag. It also promotes transparency in the conduct of monetary policy with the announcement of targets and the reporting of measures that the BSP will adopt to attain these targets, as well as the outcomes of policy decisions.

The shift to IT framework was a natural transition for the BSP since its basic elements–the primacy of price stability as the objective of monetary policy, and the BSP’s fiscal and administrative autonomy or central bank independence–are already institutionally present, both in the 1987 Philippine Constitution and in the BSP charter. Also, the national government had already been announcing to the public its annual inflation targets since 1994.

The inflation target-setting process in the country is largely based on the existing framework for coordination among government economic agencies under the Development Budget Coordination Committee (DBCC). The National Government (NG)through the DBCC, sets the inflation target two years ahead, in consultation with the BSP. However, the responsibility of achieving the inflation target rests primarily with the BSP. The coordination between the BSP and the NG on the setting of the inflation target ensures that it is aligned with the overall policy framework of the country.

The BSP manages inflation through its conduct of monetary policy, which is done primarily by moving its policy interest rate. The Monetary Board (MB) meets eight times per year to review, discuss and decide on the appropriate monetary policy stance of the BSP to keep inflation within the target. The decisions made are based on a comprehensive set of economic information available at the time of the policy meeting. To strengthen the decision-making process, the MB receives recommendations from the Advisory Committee (AC), a technical body which meets regularly prior to each MB monetary policy meeting. The AC meetings are intended to serve as a forum for in-depth, comprehensive, broad-ranging and balanced assessment of the different factors affecting inflation.

The BSP also has a number of disclosure and reporting mechanisms to help the public gauge the BSP’s commitment to achieve the inflation target. These include various reports and publications, including the Quarterly Inflation Report and the Highlights of the Meeting of the Monetary Board on Monetary Policy, as well as regular seminars and conferences involving the discussion of monetary developments and policy issues. Moreover, to ensure accountability in case the BSP fails to achieve the inflation target, the BSP Governor issues an Open Letter to the President explaining the reasons why actual inflation did not fall within the target, along with the steps to be done to bring inflation towards the target.

How successful was the IT framework in the Philippines? From a 12.2-percent annual average inflation from 1988 to 1994 that declined to 6.9 percent from 1995 to 2001, the BSP succeeded in taming inflation as headline inflation rate decelerated further to 3.8 percent from 2002 to 2018. For the past 16 years, the BSP also managed to keep inflation within prudent and manageable bounds, accompanied by solid economic growth despite the presence of global and domestic shocks. Moreover, the enhanced transparency and accountability associated with the shift to IT regime has led to the continued anchoring of market inflation expectations to monetary policy decisions.

While it is true that the low inflation global economic environment in recent years has helped in pulling down actual inflation in the country, the BSP’s success in taming inflation did not escape the notice of international observers. The Asian Banker recognized BSP as “Best Macro Economic Regulator” in 2013, 2016, and 2017 for its “disciplined effort to maintain low and stable inflation.” The Philippines’ low and stable inflation is one of the factors that credit rating agencies often cite for the favorable ratings of the country, the latest of which is a rating of BBB+ from Standard & Poor’s, two notches higher than the minimum investment grade of BBB-. An international survey also identified the Philippines as one of the countries where transparency has improved the most.

Going forward, the BSP continues to take measures to further enhance the implementation of the IT framework by improving its suite of models, data, software, the capability of its technical staff and modelers, and the way it communicates its assessment of current conditions and outlook. This is to ensure that the country's IT framework keeps up with the BSP's increasing role in maintaining macroeconomic stability amid the emergence of new technologies and increasing global integration.