BSP’s interest hike won’t address supply-driven inflation – Pernia

Socioeconomic Planning Secretary Ernesto Pernia says tightening of monetary policy by the Bangko Sentral ng Pilipinas ‘will not directly address the supply side of inflation’

by Ralf Rivas, Rappler, Aug 10, 2018

MANILA, Philippines – Markets may have hailed the Bangko Sentral ng Pilipinas for showing force and implementing its strongest policy rate hike in 10 years, but Socioeconomic Planning Secretary Ernesto Pernia said it would have little impact on taming inflation.

Inflation in July jumped to another fresh high of 5.7%, while the country’s gross domestic product (GDP) slowed down to 6% during the second quarter of 2018.

Pernia explained on Thursday, August 9, during the announcement of the economy’s secondquarter performance that the recent move of the BSP could address the second-round effects of rising prices. However, he also said that the move would only address demand pull inflation.

“Monetary policy is more of a demand side solution to inflation, not the supply side. But our inflation is mostly caused by the supply side– the availability of goods, high global oil prices. Those are the main causes of supply side inflation, as well as the unavailability of rice on time,” Pernia said.

“It will not directly address the supply side of inflation,” Pernia added

What drives inflation – The rise of prices are caused by the push and pull of supply and demand.

Cost push inflation occurs when there is limited supply of certain goods in the market and the cost of producing these goods are high. An example of which is the current rice situation, where there is limited supply of cheap rice in the market and pushed prices higher. (READ: Rice prices soar as Duterte marks 2nd year in office)

On the other hand, demand pull inflation happens when a lot of people try to buy goods at a limited supply. When people have more cash, this elevates the prices of goods.

Pernia said we are experiencing a supply-driven or a cost push inflation.

How monetary policy tempers inflation – The BSP on Thursday, August 9, hiked policy rates by 50 basis points. The move hoped for consumers to loan from banks less due to high interest rates. (READ: FAST FACTS: What does the Bangko Sentral ng Pilipinas do?)

Less loans means less cash on hand from consumers, which in turn lowers prices of goods over time.

However, inflation in the country now is mostly supply driven. But this does not mean the BSP’s move will not have an effect.

“The tricky thing with inflation is there’s this concept of self-fulfilling prophecy… ibig sabihin kapag ang expectation nila na tataas pa ang inflation, bibili na sila ng produkto ngayon at magho-hoard kasi alam nilang mababa ang presyo ngayon kaysa next month or next year at kung bumili sila ng bumili, It feeds into the demand-pull inflation. Ang inflation pataas siya ng pataas based on our expectations,” AJ Montesa of the Action for Economic Reforms said on Friday. (Rappler Talk: Making sense of the Philippine economy)

(It means if people expect inflation to go higher, they will buy now and hoard because they know prices are lower now than it will be next month or next year. If feeds into the demand pull inflation. Inflation goes up based on our expectations.)

For UP School of Economics PhD candidate and Rappler columnist JC Punongbayan, the central bank’s move manages people’s expectations.

“Isa itong paraan ng gobyerno na ipakita sa tao na mayroon siyang ginagawa para ibsan ang inflation,” Punongbayan said.

(This is a way for government to show it is doing something to address inflation.)

Punongbayan said the effects of the monetary policy will not be felt immediately. He cited studies that said it would take over a year to feel the effects of a tighter monetary policy. – Rappler.com