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THE INFLATION, THE BSP AND THE PESO

[by Rick Daligdig]

Last Thursday, The Bangko Sentral ng Pilipinas (BSP) in a surprise move fire off its’ biggest key rate hike, a 360 degrees turnaround from being dovish to hawkish stance. The BSP raise the benchmark interest rate by 75 basis points (bps).

BSP Governor Felipe M. Medalla said the Monetary Board raised its key rate to 3.25%, effective immediately, which brought back the rate to the March 2020 level. Rates on the overnight deposit and lending facilities were also hiked by 75 bps to 2.75% and 3.75%, respectively. 
Two major factors are being considered in this, the further depreciation of our currency and to tame off the upward trend of inflation.

INFLATION AND OIL.
The latest inflation print was at 6.1%, the highest in nearly four years. It also exceeded the BSP target band which is at 2-4%.  The average inflation rate in the first six months is 4.4%, still below the BSP’s full-year forecast of 5%. Before we go on, let’s take a look back at why we are experiencing this? For external factors, the ongoing and where to end Ukraine – Russia war which makes the first world countries decide to put economic sanction to Moscow, one of these are not buying oil from them. As a result, the price of Oil in the international market rose to all-time high. We being an oil-importing country stormed by this event, we saw this to pump prices as high as 95 pesos/liter. For internal factors the transport fare hike, price adjustment to the basic commodities due to high cost of production, supply disruption of foods due to low agricultural production makes our inflation ballooned. Blessing in disguise, if I should say, due to China’s slow economic activity because of a series of lockdowns in a bid to control their COVID 19 outbreaks and the other countries respond to fight their local inflation, the demand for oil lessens resulting in prices decrease in the market so we are reprieve by an oil price rollback. But nothing last forever, once China is normalized then loosened their lockdown expect another oil price hike again.

THE BID TO REVIVE THE PESO
Philippine Peso (Php) dive to its record low since 2005. Year to date, the local unit has weakened by 10.09% or by P5.15 from its close of P51 versus the dollar on Dec. 31, 2021. Last Friday, the peso closed at 56.29 pesos gaining from 56.37 on Thursday’s market. The gaining of peso can be attributed to the rate hike but still a lot to do to catch up. Why does the BSP need to stabilize the local currency? Although we know our OFWs are happy because depreciated peso means more remittances they will send to their families. Our exporters are also on the winning side because of more revenue in their business. On the other side importer and those industries that needs imported raw materials in manufacturing will be affected. This means an increase in production cost which will, later on, translate to a higher price of end products. The monetary board’s decision to pull its trigger is because the US economy, the largest economy in the world are decisively taking broad steps to fight also their all-time high inflation rate ar 9.1%. Sources said that the Federal Reserve is thinking of a full percentage hike to arrest inflation but it also looming the US economic recession as well as a global economic slowdown.

OTHER FACTORS
The impending world food crises, the COVID 19 epidemic and internal issues are other role players in how the government reacts to address inflation and peso depreciation. We can see still a better picture. In a separate statement, Finance Secretary Benjamin E. Diokno said the Philippine economy is robust enough to absorb the policy rate hike.

“The growth outlook is seen to be supported by the maintenance of loosened quarantine restrictions as well as the positive impact of structural reforms… The National Government will continue to adopt a gradual and calibrated path of fiscal consolidation to help preserve the strong growth momentum,” Mr. Diokno, a former BSP governor, said.

Inflation and Currency Management are one of the tasks of our BSP. Lucky enough, they have more rooms and tools to fight inflation and to make peso afloat. They need to be careful enough because we are still recovering from the pandemic. We need to make our economy going and make a strong finish this year. The role of BSP is very vital in these times. #DM

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