Managing inflation expectations crucial to ensuring financial system’s stability

THE BANGKO SENTRAL ng Pilipinas (BSP) should manage inflation expectations to maintain both price and financial stability as the country continues to grapple with the economic fallout from the Middle East conflict.

GlobalSource Partners Philippine analyst and principal advisor Diwa C. Guinigundo, a former central bank deputy governor, said potential second-round effects risk de-anchoring the BSP’s inflation expectations.

“True, inflation is deriving more pressures from the supply side, but the demand side will also be hit once the second-round effects are felt by the consuming and riding public. And therefore, inflation expectations may be de-anchored,” he said in an interview with Money Talks with Cathy Yang on One News on Tuesday.

“That’s where the central bank should come in and communicate to the general public its singular commitment to maintain price stability, and ensure that even in the process of maintaining price stability, financial stability — meaning the banks, financial institutions and even the financial markets — will be ensured,” Mr. Guinigundo added.

Oil price shocks caused Philippine headline inflation to quicken to its fastest pace in 20 months in March, settling at 4.1% from 2.4% in February and 1.8% in the same month last year.

This was the first time since July 2024 that the monthly consumer price index breached the BSP’s 2%-4% annual target.

March inflation also came in above the 3.8% median estimate in a BusinessWorld poll of 18 analysts and the central bank’s 3.1%-3.9% forecast for the month.

On March 26, the Monetary Board left benchmark rates untouched in an off-cycle review held to assess the impact of the fast-changing situation in the Middle East.

Officials said they decided to stand pat as inflation risks stemming from the war are supply-driven, which monetary policy cannot effectively address. They added that raising rates could delay the economy’s recovery.

BSP Governor Eli M. Remolona, Jr. also said future policy decisions will focus on tempering second-round price effects, which they expect to manifest through higher transport fares, food and fertilizer prices, electricity rates and wages.

The Monetary Board’s next policy review is on April 23.

For Mr. Guinigundo, the BSP could have already tightened as early as its first policy review this year.

“It could have paused last December and then started increasing the policy rate last February and continue communicating to the public the need to tighten monetary policy,” he said.

He also flagged potential stagflation risks.

“The prospect for economic growth may not be as bright as some people would like to show, and therefore, we may be in a situation where prices continue to increase unless the central bank intervenes and really tightens monetary policy, and the financial sector also contributes to the effort to maintain price stability.”

He added that Filipino taxpayers would get the short end of the stick if the National Government decides to impose tax relief measures amid the oil supply crisis as foregone revenues from these will have to be recouped in other ways.

Still, Mr. Guinigundo said the government may suspend the value-added tax (VAT) or excise tax on petroleum products for a limited time to lower pump prices and provide consumers some immediate support.

“If we consider the relative effect of removing the excise tax versus, let’s say, VAT and providing time-bound targeted support to affected sectors, I think the impact of the excise tax would just be limited. But somehow, it could provide some relief, at least during this period,” he said.

Late last month, President Ferdinand R. Marcos, Jr. signed into law a measure temporarily authorizing the Executive department to suspend or reduce the excise tax on petroleum products.

As of writing, Mr. Marcos has yet to declare his decision regarding the fuel excise tax.

However, the Palace said the Development Budget Coordination Committee, composed of the country’s economic managers, met with the President on Tuesday to present their recommendations. — Katherine K. Chan