​From US inflation to Philippine monetary policy

PHILIPPINES - In Brief 14 Jul 2021 by Romeo Bernardo

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For months now, global markets have been fretting about rising US inflation with anxieties running higher following upside surprises in the headline rate and news after the Fed’s June policy meeting that its next interest rate increase may come in 2023, a year ahead of what was earlier signaled. Although the Fed’s overall tone to date remains dovish, stressing that current high inflation is transitory and reflects spending recovery as immunization spreads, markets remain divided between those who agree with the Fed and those who think that inflation will persist, forcing policy rate hikes as soon as next year. In the wake of increased market gyrations, BSP Governor Benjamin Diokno told reporters that “a Fed rate hike in 2023 is less of a threat to the Philippine economy compared to other developing and emerging economies,” citing the economy’s “sound fundamentals.”[1] In a speech a few weeks later, he made it clear that “the BSP will withdraw monetary support only when there are indisputable signs of solid economic recovery amid manageable inflation environment as well as sustained downtrend in community transmission of the virus.”[2]The Governor’s boldness in asserting the BSP’s independence from the Fed follows local disinflation in recent months. The latter benefited from a Presidential order to allow freer pork importation for a year that has resulted in falling meat prices which helped to offset higher than expected increases in world crude oil prices. Likewise, the Philippine external balance sheet is quite robust and the peso had strengthened markedly. Thus, despite openness to capital flows, any reversal in these flows at this time that would lead to a weaker p...