IMF: Further BSP tightening needed to tame inflation

MANILA, Philippines — A further tightening in the monetary policy stance of the Bangko Sentral ng Pilipinas (BSP) is necessary to curb rising inflationary pressures and sustain the Philippines’ economic growth momentum, the International Monetary Fund (IMF) said yesterday.

The IMF, however, said  the Philipines is one of the region’s top economic performers in recent years as a result of prudent policies and critical reforms. As such, the IMF retained its 6.7-percent economic growth forecast for the Philippines this year.

In a press conference, IMF mission chief for the Philippines Luis Breuer said  near-term risks to the economy have increased due to rising inflation. 

 “Policies need to be adjusted to reduce inflationary pressures, while structural reforms should continue to support inclusive growth. Against the backdrop of a shifting economic environment, our discussions focused on the need to support growth while safeguarding macroeconomic stability by adjusting policies and maintaining a healthy external position,” he said.

Breuer said the  IMF  expects inflation to average 4.7 percent this year, higher than the original target of  4.2 percent and exceeding the two to four percent target set by the  BSP, before easing back to the target of 3.8 percent for 2019.

Inflation leapt to a fresh five-year high of 5.2 percent in June from 4.6 percent in May, bringing the average to 4.3 percent in the first six months. 

Breuer said higher global oil prices, the weaker peso, and the higher excise taxes under Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law are largely responsible for the spike in inflation.

The IMF official  said there is a need for further tightening of monetary policy to anchor inflation expectations conditional on domestic and external developments.

The central bank delivered back-to-back rate hikes in May and June with a cumulative increase of 50 basis points to curb rising inflationary pressures. It lifted rates for the first time in more than three years by 25 basis points  on May 10 followed by another 25 basis points last June 20.

“The BSP’s recent decisions to increase the policy rate twice were appropriate. The team welcomes the BSP’s announced readiness to take further action to safeguard price stability and continued progress in modernizing monetary operations and reforming the capital markets,” Breuer said.

No less than BSP Governor Nestor Espenilla Jr. hinted at a strong follow through monetary adjustment at the next rate setting meeting of the Monetary Board on Aug. 9.

“On monetary policy, I think the BSP has been very clear and we support the BSP in this position that they are taking the inflation challenge very seriously and will take measures to address that so that the inflation outcome will gradually come back to what the official range is for next year,” Breuer said.

According to Breuer, the impact of the upside risks to inflation would dissipate translating to lower inflation over the coming months until next year.

“We do see inflation in a downward trend this year and next year, gradually coming down this year, but we also see that the risks to inflation has increased for a number of reasons. The main message is that we expect inflation to come down in part because you have a number of supply shocks that are expected to weaken as time goes by,” he said.

He said the passage of the proposed amendments to Republic Act 8178, otherwise known as the Agricultural Tariffication Act of 1996, is a very important element in easing inflation.

“The rice tariffication is very important element in the reform agenda of the authorities and we support that plan. And it will lead to lower rice prices because international prices are lower than domestic prices,” he said.

The IMF, with the completion of the 2018 Article IV mission to the Philippines, stressed the need to maintain the budget deficit at around 2.4 percent of GDP for this year and next year to help contain inflationary pressures.

“Rising tax revenues, including from tax reform, and the reallocation of spending from non priority programs can support expanding public investment at a pace that protects stability while sustaining strong growth,” he said.

Breuer said maintaining exchange rate flexibility to support the economy’s ability to adopt to external shocks and at the same time pursuing measures to safeguard financial stability amid the continued rapid credit growth and rising corporate debt would help safeguard macroeconomic stability.

The multilateral lender is also supporting the enactment of the proposed amendments to the BSP charter, the other packages of the comprehensive tax reform program (CTRP), and the streamlining of fiscal incentives.