BSP intervention kept inflation from spiraling above 8% – IMF

Inflation could have peaked above eight percent had the Bangko Sentral ng Pilipinas (BSP) failed to intervene on time to curb the sharp uptick in consumer prices due to elevated oil and food prices.

A research paper of the International Monetary Fund (IMF) titled “Decomposing the inflation dynamics in the Philippines” said a delayed monetary policy tightening could be costly in terms of higher inflation rates.

The paper’s authors Si Guo, Philippine Karam and Jan Vicek said a delayed response could require larger and more aggressive rate hikes to bring inflation under control.

“If the policy rate was kept at the level observed in the first quarter of 2018 for the entire year of 2018, peak inflation would have been above eight percent (yearon-year) with inflation not returning to the target band until end-2020. This would have called for a much more aggressive monetary tightening following the delayed response,” the paper said.

Inflation accelerated to 5.2 percent last year from 2.9 percent in 2017 and exceeded the BSP’s two to four percent target due to elevated oil and food prices as well as weak peso.

It peaked at 6.7 percent in September and October, prompting the BSP to lift interest rates by 175 basis points in five straight ratesetting meetings from May to November last year to anchor inflation expectations.

The authors used two scenarios including with or without monetary tightening in its out-of-sample forecast using information up to the second quarter of last year.

Had the BSP kept interest rates unchanged last year, the authors said inflation would have further increased by about 0.5 percent by end-2018.

“Our results show that the increase in global commodity prices contributed substantially to the rise in inflation rates in the Philippines in 2018, with some delay noted in the pass-through of international oil and food prices,” the authors said in the paper.

Furthermore, inflation was driven by demand factors attributed to a relatively accommodative monetary policy, with model estimates showing interest rate adjustments lagging the pace implied by the central bank’s inflation forecast-targeting interest rate rule before May 2018.

“The counterfactual experiment simulation results suggest that had the BSP delayed its action, the Philippine inflation would have risen by an additional 0.5 percentage points compared to baseline by end-2018,” it said.

Likewise, widening trade deficits in 2018 corroborated the importance of demanddriven factors in influencing inflation.

The paper confirmed the need for monetary tightening in 2018 to avoid a much more aggressive interest rate reaction following a delayed response.