Monetary policy ineffective vs supply-driven inflation — NEDA

An aggressive monetary policy could prevent second-round effects of rising inflation, but would have little impact on nipping the source of domestic inflationary pressure, the National Econom- ic and Development Authority (NEDA) said yesterday.

Socioeconomic Planning Secretary and NEDA Ernesto Pernia said rising inflation is primarily caused by issues in the supply side of the economy, particularly in agricultural products.

Headline inflation has spiked to 5.7 percent in July, quickening from 5.2 percent in June and 2.4 percent in July 2017 mainly due to rising food prices. This brings the year-to-date inflation average to 4.5 percent.

NEDA remains optimistic, however, that inflation would moderate by the end of the year in line with the forecast of the Bangko Sentral ng Pilipinas.

“Inflation is always antithetical to growth. Monetary policy is more of a demand side solution to inflation, not the supply side. But our inflation is mostly caused by the supply side: the availability of goods, high global oil prices. Those are the main causes of supply side inflation, as well as the unavailability of rice on time,” Pernia said.

“Monetary policy is an answer to second-round effects of inflation because of expectations. But it will not directly address the supply side of inflation,” he added.

Along with the proposed replacement of quantitative restriction on rice with tariffication, economic managers are considering the possibility of lowering import duties for selected basic commodities to a uniform five percent to curb inflation.

This covers tariff reductions on farm products like pork, corn, feed wheat and fish. Duties for these products currently range from 20 to 30 percent.

Pernia said the proposed uniform five percent rate for such agricultural commodities would be enforced until inflation pulls back to within the government target range of two to four percent. This single rate, he said, was unanimously agreed upon by economic managers.

“The single rate reduction is a good strategy because it does not affect consumption much. It is also easier to monitor and implement. The measures is temporary as the tariffs will revert once we get back to our normal inflation target,” he said.

He noted, however, that liberalizing rice trade in the country would still have a bigger impact on curbing inflation as it is the single largest item in the consumption basket of the country’s poorest households.

“I think if we remove the quantitative restriction on rice and just tariffy it, it will have a bigger impact because rice has a dominant weight in the food basket of consumers especially the poorest 30 percent, the others not so much,” said Pernia.