The Bangko Sentral ng Pilipinas (BSP) is under increasing pressure to fulfill its statue primary responsibility under the New Central Bank of 1995 (and its predecessor, the Central Bank Act as amended by Presidential Decree No. 71), which is the maintenance of domestic and external monetary stability.
Domestic monetary coalitions are anything but stable, namely as a result of the slew of excise taxes imposed by the Duterte administration’s TRAIN (Tax Reform and Inclusion) program and the resurgence of the world oil market, the inflation as measured by consumers prices rose in June to 5.2 percent, its highest level in five years. Inevitably, price increase and higher wage demands ensued, with higher wages prices and higher wages chasing one another upward. The upward movement of costs and prices (including the price of labor) is ongoing.
Nor is the external monetary environment characterized by stability. The Philippines’ merchandise trade suffered yet another, monthly deficit, bringing its January-to-May deficit to a whopping $15.76 billion. That is almost one-fifth of this country’s gross international reserve. The five-month BOT (balance of trade) brought the to-date BOP (balance of payments) deficit past the $1.5 billion mark. Sensing this country’s deteriorating BOP position, the international financial markets steadily marked down the peso. Today the peso has depreciated down to 53 to the US dollar.
Government—and even, distressingly, private—economists like to downplay the negative implications of a depreciating peso by saying that a lowest-value peso is good for Philippine exports, OFW (overseas Filipino workers) remittances and inward tourism. But the far more serious negative effects of a falling peso is the inflationary impact of rising prices of imported consumer goods and the higher service on debts denominated in foreign currencies. True, OFW families will receive more pesos for the remittance they receive—thereby making possible an increase in consumption spending, which accounts for around two-thirds of this country’s gross domestic product—but Philippine exports are not about to turn around anytime soon and the Philippines is likely to remain near the bottom of the ladder as a high-priority FDI destination.
Clearly, BSP has its plate full both domestically and externally.
And what has been the response of the BSP—more accurately, the Monetary Board—to these disturbances of the nation’s domestic and external monetary stability? Two upward adjustments in its overnight borrowing rate, in May and then in June, which have brought that rate up ti 3.5 percent, its highest level in four years. “The monetary authorities are treating the inflation outlook as a concern, given the elevated inflation expectations and the increasing risks of the second-round effects of ongoing price pressures,” BSP Gov. Nestor A. Espenilla Jr. said after the second rate increase.
What does the BSP expect to accomplish with the interest rate increases that it has put into effect? Which of the two basic objectives of interest-rate raising—discourage lending and spending and encourage and non-consumption—does it want to see achieved?
Raising interest rates has the effect of increasing production costs and consumer prices, and where basic goods—or what economists call goods in inelastic demand—are concerned, higher interest rates can only add further fuel for the inflationary file. With all due respect to Governor Espenilla and his Monetary Board colleagues, I really cannot see any logic in raising interest rates under the present economic circumstances. The interest rates tool is the wrong monetary tool to deploy.
Turning now to the BOT/BOP picture, the merchandise trade imbalance can only get worse, given (1) the weakness of this country’s export sector and (2) the Build, Build, Build program’s voracious need for imported equipment and supplies. Higher interest rates will deal a double whammy to the BOT: They make imports more costly while having little impact on exports in the near term.
The BSP will have to do a thorough rethink of its approach to the monetary-instability problems that it is forcing—surging consumer prices, a worrisome BOP deficit, a steady depreciation of the peso and, lately, a decrease in the gross international reserve. Raising interest rate is not the answer. Gov. Espenilla and his colleagues should select another weapon(s) from the BSP’s awesome armory.
