IMF sees need to adjust rates earlier

 IMF sees need to adjust rates earlier
BW FILE PHOTO

By Luz Wendy T. Noble, Reporter

THE Philippine central bank may have to reassess its loose monetary policy earlier than planned as the surge in commodity prices raised inflation concerns, the International Monetary Fund (IMF) said.

“While there is still some policy space to absorb the price increases, as the latest numbers show that inflation is in the middle of the BSP’s (Bangko Sentral ng Pilipinas) target range, greater vigilance from the monetary authorities will be required, and the accommodative monetary policy may need to adjust earlier than expected,” IMF Representative to the Philippines Ragnar Gudmundsson said in an e-mail.

A poll held by BusinessWorld last week showed 15 out of 17 analysts expect the Monetary Board to retain its record low policy rates today (March 24), in line with signals from the central bank that it will remain patient in supporting growth.

BSP Governor Benjamin E. Diokno has earlier said the central bank would remain patient in supporting the economy and would wait until the second half of the year to assess the need for a rate hike.

The consumer price index (CPI) rose by 3% for the second straight month in February, which is within the BSP’s 2-4% target range. However, the BSP has warned that inflation could breach the target range in the second quarter if oil prices continue to climb.

Global crude oil prices have been extremely volatile in recent weeks after Russia’s invasion of Ukraine. This was due to worries over supply as Russia is the world’s second-biggest oil exporter.

Commodity prices have also spiked around the world. Wheat is a major export for both Russia and Ukraine.

Mr. Gudmundsson noted that oil and gas, energy and transportation, and wheat have a combined weight of about 18% in the country’s CPI.

“The current surge in energy and commodity prices has added to the inflationary pressures already caused by supply chain disruptions and the rebound from the coronavirus disease 2019 (COVID-19) pandemic,” he said.

“One should therefore expect some pass-through of these higher prices to headline inflation in the coming months,” he added.

Mr. Gudmundsson said the IMF estimates that the pass-through impact of world oil prices in emerging markets to prices paid by consumers is 25%.

“The war will affect the cost of living, especially for the poorest households disproportionately affected by the increase in energy prices,” he said.

Since the start of 2022, pump prices of gasoline, diesel and kerosene have increased by P14.90, P19.20, and P16.35 per liter, respectively.

Meanwhile, Mr. Gudmundsson noted the country’s strong external position serves as a safety net amid market volatility and the weakening of the peso caused by the war in Ukraine.

“While market uncertainty may prompt an increase in government bond yields and intensify pressure on the currency, it’s important to note that the Philippines benefits from its flexible exchange rate and a strong foreign exchange reserves position,” he said.

The IMF in a blog titled “How War in Ukraine Is Reverberating Across World’s Regions” last week has said Asia-Pacific economies will only experience limited spillover effect from the war due to the distant economic ties. However, it warned that a slower growth in Europe and the global economy could hit petroleum importers in Southeast Asia.

“Asia’s food price pressures should be eased by local production and more reliance on rice than wheat. Costly food and energy imports will boost consumer prices, though subsidies and price caps for fuel, food and fertilizer may ease the immediate impact — but with fiscal costs,” it said.

The IMF expects the Philippine economy to grow by 6.3% this year, which is below the 7-9% government target. In January, it said the impact of the Omicron variant will be limited to the first quarter of the year.

The economy expanded by 5.6% last year following a record 9.6% contraction in 2020.