RP can still ease monetary policy, says IMF

Inflation pressures have been rising across Asia but the International Monetary Fund (IMF) said the Philippines is one of the few countries in the region that could still afford to ease its monetary policy to support growth.

In its Regional Economic Outlook (REO) report released yesterday, the IMF said both headline and core inflation rates have been increasing across the region in recent months after leveling off in 2007.

In the Philippines and most of emerging countries in Southeast Asia, the IMF noted that core inflation is rising as food and commodity price rises begun to generate some second-round effects.

Moreover, producer price inflation was already running above headline inflation across much of the region, indicating that there was a potential for more price pressures ahead.

In the Philippines, monetary officials admitted that the average inflation rate would be higher over a longer period than originally expected and they have hinted that government might breach its three-to five-percent inflation target this year.

According to the IMF, monetary authorities in Asia have used a range of tools to combat rising inflation pressures but only a handful still had remaining options in the face of rising inflation.

Moreover, the IMF said the BSP and other central banks have to balance the need for supporting growth amid the slowdown in the US and Europe while also ensuring that inflationary pressures are well-contained.

“A potentially thorny monetary policy issue facing a number of Asian policymakers in the baseline scenario is the interaction between interest rates visà-vis the United States, capital inflows, and the exchange rate,” the IMF added.

With the US Federal Reserve aggressively lowering policy rates, the IMF said there was pressure for the central bank to follow suit if only to stem interest rate sensitive inflows.

However, given rising inflation pressures, the IMF said the central bank might find it difficult to lower policy rates.

“Should the downside risks to the forecast materialize, it is expected that a monetary policy response would be appropriate for most countries,” the IMF said.

In this scenario, the IMF said growth would decline substantially and inflation pressures would be expected to moderate,” the IMF pointed out. “This would afford room for authorities in the region to lower policy interest rates or otherwise loosen monetary settings.”

The IMF said the Philippines at least had some scope for easing its monetary policies to support growth without too much risk of aggravating an already stressed inflation scenario.

The IMF said the country’s flexible exchange created a favorable condition especially since the pressure remained on the strong side. At the very least, the IMF said appreciating currencies help dampen inflation pressures by lowering import costs.

The IMF said the focus of authorities in the region should be placed on real effective exchange rates, given that recent bilateral appreciation against the dollar has been largely neutralized in real effective terms, reflecting the dollar’s decline on a multilateral basis.

Still, the IMF advised central banks in the region that they should also start reviewing “contingency plans” given the prominence of financial sector risks in the downside scenario.

“In countries where the structure of bank funding poses vulnerabilities, central bank liquidity facilities may have to be activated, implying a need for clarity on terms of access as well as the types of collateral that the monetary authorities would accept.

“The authorities should carefully monitor mark-to-market exposure and funding risks and formulate plans to handle potential calls for bank recapitalization,” the IMF said.