May 20th, 2022
Joey Sarte Salceda
Chairman House Ways and Means
• The space for maintaining an accommodative policy stance has considerably narrowed given how the April 2022 inflation of 4.9 percent settled near the higher end of the BSP’s forecast range of 4.2 (percent) to five percent. Meanwhile, second round effects are starting to manifest
• Due to the rising oil and food prices, the Regional Tripartite Wages and Productivity Board on May 13 approved a P33 increase in the minimum wages in the National Capital Region (NCR), bringing the pay rate to P570 and P533 for workers in the non-agriculture and agriculture sectors. For Western Visayas, the wage increase was P55 and P110 to P450 and P420, respectively.
• Wage hikes “leaves the door open for further increases in other regions as wage petitions were deferred since 2020 as the pandemic disrupted economic activities.” This will translate to a more evident second-round effects to inflation.
• Higher than anticipated for the first quarter at 8.3 percent has intensified calls for the “withdrawal” of an accommodative policy stance which the Monetary Board has maintained since November 2020 with a record low of a two-percent benchmark rate.
• Any adjustments in the monetary policy stance will be done in a timely manner so as not to disrupt the growth momentum while preventing price pressures from becoming entrenched.
Other BSP outlook notes
1. Inflation upside risks
a. A further increase in global non-oil prices due to strong global demand amid persistent supply chain bottlenecks
b. Higher global oil prices especially as OPEC continues its policy of only gradual supply increases
c. Potential impact of continuing constraints on the supply of key food items
d. Petitions for jeepney fare hikes due to higher oil prices
e. Wage hikes (around 6% of past minimum wage in NCR, which could boost overall costs by as much as 1.4%)
2. Growth prospects
a. The Philippines remains in a sound position as its macroeconomic fundamentals underpin the economy’s recovery in 2022. The Development Budget Coordination Committee expects the economy to grow by 7.0 to 9.0 percent in 2022.
b. Risks and challenges remain as the emergence of highly transmissible COVID-19 variants delays the normalization of economic activities. [Salceda projections for Omicron are that hospitalization use will be much lower than past surges, if new Omicron surge materializes]
c. The timely imposition of appropriate pandemic-related measures is necessary to control COVID-19 surges and arrest the spread of the Omicron COVID-19 variant. The continued vaccination efforts and improving healthcare interventions in managing severe cases should usher the eventual transition of COVID-19 from pandemic to endemic.
3. External action by other monetary institutions abroad
a. BSP notes ongoing policy normalization by major central banks could heighten volatility in financial markets. Some central banks of major advanced economies, including the Bank of Korea, Reserve Bank of New Zealand, and Bank of England, have already raised key interest rates.
b. While the shift to policy normalization of advanced economies could affect capital flows and lead to financial market volatility, this also reflects opportunities for economies like the Philippines in terms of increased trade activities.
c. Although the normalization of the currently ultra-accommodative monetary policy in advanced economies could lead to a rebalancing of global capital flows and depreciation of emerging markets’ currencies vis-à-vis the dollar, the Philippines is in a favorable position to navigate tightening global financial conditions given the manageable inflation environment and sufficient external buffers.
d. The current level of gross international reserves – at USD108.45 billion – is more than sufficient to withstand adverse external shocks.
e. Structural flows from remittances, IT-BPM revenues, and foreign direct investments are expected to further bolster the country’s external payments position.
f. BSP’s adherence to a market-determined exchange rate system and our macroprudential measures will continue to allow us to curb excessive FX volatility and respond to instability in financial markets. Should external developments bring about risks to the domestic outlook for inflation and growth, the BSP stands ready to calibrate policy settings as needed.
Expected schedule of BSP policy rate adjustments (2022-2023) [projected by HSBC]
Schedule
Adjustment
Rate after adjustment
May 19
25 bps
2.25
June 24 (MB meeting)
25 bps
2.50
Q3 (total hikes)
50 bps
3.00
Q4 2022
25 bps
3.25
Q1 2023
25 bps
3.50
Q2 2023
25 bps
3.75
Q3 2023
25 bps
4.00
Q4 2024
0 bps
4.00