BSP’s Diokno: Space for accommodative monetary policy has narrowed

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno has indicated that there is now less space for an accommodative monetary policy, but any changes should be conducted in a timely manner.

Diokno on Wednesday said that while inflation pressures have been linked mainly to supply-side factors, which are best addressed by non-monetary interventions, secondary effects are starting to manifest.

"The space for maintaining an accommodative policy stance has considerably narrowed given how the April 2022 inflation of 4.9% settled near the higher end of the BSP's forecast range," he said.

Inflation clocked in at a three-year high of 4.9% in April, with diesel prices up by 83.7%, gasoline by 43.0%, and passenger transport by sea by 13.6%.

“While the economy is now towards returning to its pre-pandemic trajectory, there also remains significant downside risks to growth,” Diokno continued, noting the resurgence of the COVID-19 pandemic and the slower global economic activity.

The Philippine economy grew by 8.3% in the first quarter of the year, up from 7.8% in the previous quarter and -3.8% in the same quarter of 2021.

“These developments strengthen the case for a withdrawal of monetary policy accommodation as inflationary pressures now appear more likely to persist and threaten to disanchor inflation expectations,” Diokno told reporters in a virtual briefing.

“Any adjustments in the monetary policy stance will be done in a timely manner so as not to disrupt the growth momentum while preventing price pressures from becoming in trends,” he said.

The Monetary Board is scheduled to meet on Thursday, May 19, to discuss whether or not policy settings remain appropriate given the current inflationary environment.

Domestic pump prices have been on an uptrend, with rollbacks implemented only six times so far this year.

Diokno indicated that with the volatility of oil prices, the national government should remain “vigilant” in implementing measures which could help ease second-round effects in terms of fare hikes and “undue” wage adjustments.

The latest BSP forecast indicates that inflation is expected to average 4.3% this year, reflecting the impact of higher global commodity prices. It is also seen to settle above the 2% to 4% target range in the second half of the year.

Diokno explained that prices could be impacted by the pass-through effect of the ongoing conflict between Russia and Ukraine, which could hit trade, financial linkages, investor confidence, and commodity markets.

“The challenge now is in making sure that this persistent price pressures will not translate to undue movements and inflation expectations and to further second-round effects,” he said.

Diokno maintained that geopolitical tensions will have only a "limited" impact on the Philippine economy, owing to the country's limited exposure to it both geographically and economically.

“The BSP remains vigilant in monitoring these developments and stands ready to act should it see any sign of inflation expectations becoming disanchored,” he said. —VBL, GMA News