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Philippine gov't urged to act on inflation pressures

Publication Date : 09-07-2014


Consumer prices will keep climbing in the Philippines unless administration officials adopt urgent measures to address the tightness in supply of key commodities, a senior central bank official said.

The Bangko Sentral ng Pilipinas (BSP) is now under pressure to adjust monetary settings to control demand and keep it from exacerbating the situation caused by dwindling supplies.

“Basically, monetary policy rolls with the punches,” BSP Deputy Governor Diwa C. Guinigundo said, noting that prices have risen of late due to supply pressures over which the central bank had no control.

In June, inflation remained at an elevated 4.4 per cent from May’s 4.5 per cent. For the whole year, the BSP expects consumer prices to rise by an average of 4.4 per cent—faster than last year’s 3 percent, and near the top end of the official 3-5 per cent target range.

Analysts have warned that excess consumer demand, fueled by the cheap cash the BSP flooded the economy with late last year, may have started to contribute to the recent rise in prices.

Last year, around 1.4 trillion pesos (US$30 billion) in cash exited central bank vaults and entered the economy after individual investments were forced out of special deposit accounts (SDA). This excess cash fueled credit growth in the past months. In April and May, loans by major banks grew by over 20 percent.

Guinigundo dispelled the notion that so-called “second-round” effects were starting to threaten inflation expectations.

“We have to make sure, and it’s a judgment call on our part, whether there is evidence of second-round effects,” he said. “We have not seen that.”
Guinigundo explained that demand for higher wages remained stable. A sharp increase in wages across the country, he said, would create a domino effect that would push up prices of all consumer goods.

The senior central bank official said the government and employers have been successful in keeping wage increases modest, helping make the business environment more predictable and economic growth more sustainable.

Pressure to keep prices stable now lies with members of the Cabinet that oversee the supply of food and the implementation of rules that promote transparency in prices set by retailers, he said.

“It’s now up to the Department of Agriculture…. [D]espite the weather, we have a good harvest. It’s up to the National Food Authority (an agency tasked with ensuring the stability of the supply and prices of rice) to make sure we have enough supply and avoid perceived tightness in the market and artificial shortages,” Guinigundo said.

For its part, the BSP remained “ahead of the curve,” Guinigundo said, noting that monetary authorities have taken measured steps to keep demand pressures from brewing.

“Monetary policy is demand management,” he said.

The Monetary Board has tightened its policy stance at its last three board meetings.


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