Policymakers acting ‘too slowly’ on inflation

German lender Deutsche Bank has raised concerns that Philippine monetary and fiscal authorities are acting “too slowly” to address a rise in underlying inflation, which it claimed was an indication of economic overheating.

In a report published last week, Deutsche Bank chief economist in Asia Michael Spencer said that while May headline inflation was considerably better than expected, it still rose to 4.6 percent from 4.5 percent in April.

“[W]hile much of the commentary has focused on food prices, core inflation rose to 3.6 percent and seasonally adjusted, if we dare, core prices are rising at a 5.7 percent 3m/3m annualized rate,” Spencer said.

The German bank, he declared, “fundamentally” disagrees with the policymaker view that higher inflation was being driven by supply-side factors.

“We think it is a demand-side, overheating phenomenon,” Spencer said.

To their credit, policymakers have in recent months gone to great lengths to reassure people that they are working to lower inflation, the economist noted.

He pointed in particular to a push to liberalize rice imports, which the government says could lower inflation by 0.4 percent if introduced by the third quarter.

But while lower rice and fuel prices may indeed help bring headline inflation back down to the 2.0-4.0 percent target band over the next few years, Spencer said tighter monetary or fiscal policy would still be the appropriate action.

“[I]n our view, rising underlying inflation points to an overheating phenomenon for which tighter monetary or fiscal policy would be appropriate,” he stressed.

“We worry that policymakers are acting too slowly to address this.”

Inflation has risen by 1.7 percentage points since the end of last year but policy rates have been hiked by only 25 basis points, Spencer said, with real interest rates falling to their lowest levels in nearly three years.

While he applauded the Monetary Board’s decision to hike key interest rates last May 10, a subsequent move to further reduce the bank reserve requirement ratio (RRR) was said to have confused investors as to the board’s resolve to tighten liquidity.

“Monetary policy is not getting tighter, if anything it’s getting easier. In that context, the RRR cut added to the sense among investors that the central bank is not trying to tighten policy,” Spencer said.

On the fiscal policy side, meanwhile, the Deutsche Bank economist said: “We’re only four months into a year … but if revenues don’t pick up more strongly in the second half, the government may have to choose between reining in spending or breaching its 3 percent of GDP (gross domestic product) deficit ceiling.”

Latest government data showed revenues had gone up by 21 percent to P927.4 billion as of May from P768.3 billion a year earlier.

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