Key International Monetary Fund (IMF) officials urged central banks to ensure that their policy responses remain appropriately restrictive and should stay in place long enough to warrant their respective target inflation numbers returning within range.
This was emphasized by three IMF officials who collaborated in a study that noted the impact of the series of adjustments central banks around the world have had to adopt to fight inflation.
The collaborators highlighted the risk of wasting away the macroeconomic benefits of those measures by central banks terminating those anti-inflation measures too soon.
The IMF collaborators Tobias Adrian, Christopher Erceg and Fabio Natalucci published their collective concern that the price-stabilization measures put up by central banks like the BSP could all be for naught as falling energy prices that have pushed back headline inflation have recently fueled optimism that monetary policy settings might be eased too early for their anti-inflation purpose to work.
“While headline inflation has indeed fallen, and core inflation has receded slightly in some countries, both remain far too high.
“Central banks should communicate the likely need to keep interest rates higher for longer until there is evidence that inflation—including wages and prices of services—has sustainably returned to the target,” the co-authors said.
“Though this may make it tempting to conclude that monetary policy is becoming overly restrictive and poised to cause an unnecessary economic contraction, investors may be too sanguine about progress on disinflation. While headline inflation has indeed fallen, and core inflation has receded slightly in some countries, both remain far too high. Central banks must therefore be resolute in their fight against inflation and ensure policy remains appropriately tight long enough to durably bring inflation back to target,” they argued.
In the Philippines, a parallel concern was raised by former Deputy Bangko Sentral ng Pilipinas (BSP) governor Diwa C. Guinigundo who argued that inflation ranked high in the consciousness of Filipinos based on a national survey and that no less than President Ferdinand Marcos Jr. has gone sleepless over the elevated price of onion, garlic, sugar, rice and others forming part of the consumer price index or CPI.
Guinigundo also said the government, in managing inflation, was shown an 11 percent net disapproval as 42 percent of Filipinos believe its handling the issue a failure and only 31 percent rated the efforts a success.
“Based on this, one can expect households and firms to behave in a way that could protect their purchasing power, by demanding more pay, or profit, by selling high. This process could feed into higher inflation expectations. Demand for higher wages and price adjustments could only lead to inflation becoming even more entrenched,” he warned of risks confronting the monetary authorities.
Guinigundo acknowledged that while no less than BSP governor Felipe Medalla said current elevated inflation could move to within the 2 percent to 4 percent target in the third or fourth quarter this year, the central bank chief’s optimism was conditional.
“In Frankfurt, BSP Governor Philip Medalla assured the investment community that by the end of the third quarter or by the fourth quarter, inflation would be below 4 percent. Due to large base effects, inflation is expected to tip 2 percent in early 2024. His caveat was very revealing, if not too obvious. It’s impossible to rule out another supply shock, and the BSP was correct in anchoring its forecast on a successful resolution of agricultural shortages. This is a very strong assumption,” Guinigundo said of Medalla, and the rest of the economic managers with him at the investment roadshow in Germany.
He voiced his reservations and based on more recent numbers, the policy rates of the Bangko Sentral could remain elevated, which could then significantly dampen output growth across the economy seen averaging more or less 7 percent this year. The economy exceeded expectations and grew more than the 2022 target to 7.6 percent instead and this fueled optimism the restrictive monetary policy environment at the moment could ease.
According to Guinigundo, this could prove tricky: “The IMF resident representative Ragnar Gudmundson two days ago also expected a breach in the inflation target for this year. More BSP interest rate tightening may be in order, according to him.
“What is more revealing is the IMF’s estimate of what needs to be done at this point. “In the case of the Philippines, we estimate that the neutral real rate, which is the net of inflation interest rate where monetary policy is neither contractionary nor expansionary stands between 1 percent and 2 percent.
“If inflation for this year is 4.5 percent for BSP and 4.7 percent for IMF, given its current policy rate of 5.5 percent, then the BSP will have to continue jacking up by a maximum of around 100 basis points to 6.5 percent. Pray that the BSP’s ammunition would remain adequate should the Maharlika bill be rushed into law.
“President Marcos should brace himself for more sleepless nights,” Guinigundo said.
