MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is closely watching the impact of El Niño on inflation, particularly on second round effects, as inflation likely picked up for the second straight month in March.
BSP Governor Eli Remolona Jr. said the drought caused by the El Niño weather event could impact rice prices, as these salient prices tend to stand out among households and affect their inflation expectations.
“Because of that, we have to monitor rice prices – mainly rice prices (but) there are other commodities affected by El Niño,” he said. “Because rice is so dependent on water, we have to monitor their effect on expectations.”
The amount of damage to agriculture in eight regions has reached P1.75 billion as the El Niño phenomenon intensifies, an official from the Department of Agriculture said.
The damage covered 32,231 hectares of farmlands, with at least 29,437 farmers displaced.
The BSP chief said headline inflation likely further accelerated to 3.9 percent in March from 3.4 percent in February due to base effects, but lower than the 7.6 percent in March 2023.
If realized, inflation would be near the upper end of the two to four percent target range of the BSP.
To tame inflation, the Monetary Board tightened borrowing costs by 450 basis points from May 2022 to October 2023. This brought the key rate to a near 17-year high of 6.50 percent.
Dennis Lapid, officer-in-charge of the BSP’s Department of Economic Research, said supply-side shocks from the weather disturbance could be a major influence on prices.
“So that also highlights the importance of non-monetary measures in terms of dealing with these shocks,” Lapid said. “It also means that the central bank has to be on guard.”
Based on data from the Philippine Statistics Authority, rice posted a higher inflation rate of 23.7 percent in February, the highest since the 24.6 percent recorded in February 2009, from 22.6 percent in January.
Remolona told reporters that supply-side issues are best addressed with non-monetary measures, which is led by Finance Secretary Ralph Recto.
“The Secretary of Finance is one member of a seven-member monetary board,” he said. “Thankfully, we have an independent central bank, and the independence is mainly between fiscal policy and monetary policy.”
“We have to coordinate. But we’re not going to be driven by fiscal policy concerns, and that’s been working, I think,” Remolona said.
Meanwhile, the BSP chief noted that it will conduct more research on measuring the degree to which inflation expectations and second-round effects are anchored as well as the implications if these start to get de-anchored.
“Once expectations become de-anchored, our life becomes much more difficult. We have to be much more hawkish than before once expectations become de-anchored. So, we have to be able to measure the tendency for that,” he said.
He added that the central bank is looking to study the impact of lowering the reserve requirement ratio (RRR) further, as banks’ reserve requirements could be seen as a “distortion of financial intermediation.”
“They drive a wedge between deposit rates and lending rates. We’ve lowered our reserve requirements quite a bit. I think there’s room to lower them some more. But we have to time it right,” Remolona said.
Last June 2023, the BSP delivered a major reduction in the level of deposit banks are required to keep with the central bank to single-digit levels.
The regulator has slashed the RRR for universal and commercial banks, as well as non-bank financial institutions with quasi-banking functions, by 250 basis points to 9.5 percent.
Likewise, the RRR for digital banks was cut by 200 basis points to six percent, while the RRR for thrift banks was lowered by 100 basis points to two percent.
The RRR of small banks or rural and cooperative banks went down by 100 basis points to one percent.