Press Releases

Salceda says easing inflation to prevent ‘drastic’ BSP exit from easy monetary policy: House tax chair says price levels to determine monetary, tax policy in 2022

January 9th, 2022

House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) said that easing inflation, which recorded its slowest 2021 year-on-year rate last December, at 3.6%, will “provide plenty of policy room so that we don’t have to take drastic exit from our easy monetary policy.”

“I don’t expect the BSP to pull out of its low-interest policy anytime soon. In fact, I don’t think there will be any changes during this quarter, and very possibly even the next one,” Salceda said.

Salceda made the statement in response to BSP Governor Benjamin Diokno’s reassurances that the BSP will not make any drastic moves to shift away from its accommodative monetary stance.

“Governor Diokno is right to say that the approach has to be outcomes-focused rather than calendar-based. At this point, I think the only thing that could force the BSP’s hand is out-of-control inflation, which I don’t see happening in the immediate term either,” Salceda added.

Inflation to determine monetary, fiscal policy

“It is therefore very crucial that we keep inflation low. I gave a lecture last year which outlined inflation as the benchmark to watch in 2022. It goes without saying that GDP growth will be positive in 2022, probably at 5-7%. On the other hand, if inflation accelerates as it did mid-2021, households will see lower real income growth, we will be able to afford fewer public services for the same budget, and the BSP might be forced to tighten credit,” Salceda explained.

“So, inflation is the number to watch, and food inflation, in particular will be extremely important to both monetary policy and the real economic impacts of fiscal policy,” Salceda added.

“By experience, inflation is also the main determinant of political space for fiscal reforms, particularly new tax increases. In 2018, when rice inflation suddenly picked up, we could not pass any major tax reform packages. If the next President inherits a low-inflation environment, there will be political space for new taxes, perhaps on luxuries and on the rich,” Salceda said.

“We simply do not have the political opening for new taxes when prices are high. So, if we want to do tax reforms early in the new President’s term, and I can tell you we need those reforms, we need to keep prices low.”

“That is why the Department of Agriculture’s efforts to contain the African Swine Fever, increase yield in key crops, and make markets more efficient will be crucial to both monetary and fiscal policy. If we can lower inflation below 3 percent, we will have plenty of room to keep our enabling monetary policy and perhaps pass a few revenue-generating measures,” Salceda also said.

“There are signs that we will see lower inflation in 2022, as long as we don’t overreact with Omicron. When we loosened quarantine and travel restrictions in December, prices also went down, even with increased demand. That really means the price issue is still a matter of supply chains rather than a matter of demand.”

“If we can keep producers producing and transporters transporting goods, we should see stable prices this year. On the other hand, if we impose unreasonable restrictions, especially on the flow of goods, expect to see prices shoot up, with significant consequences on both monetary policy, real growth, and our ability to raise government revenues this year,” Salceda added. (end)

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