During its most recent meeting, the policymaking body of BSP (Bangko Sentral ng Pilipinas), the Monetary Board, added 50 basis points to the BSP’s basic lending rate, raising it to 4 percent. That is its highest rate since the 2008 world financial crisis.
The BSP has issued a statement indicating that the Aug. 9 rate increase—the third in 2018—was intended to counter the ongoing upsurge in consumer prices. The 50-basis-points increase apparently was the “aggressive” anti-inflationary measure that the Monetary Board has said it would be taking. Both the two preceding rate-increase actions had raised the BSP’s basic rate by 25 basis points.
The latest rate increase and the two that preceded it have raised two related questions. Is a BSP interest-rate action the most effective means for dealing with the current inflation? Is the said action likely to succeed in bringing to a halt the continuing rise in consumer prices? My answer to both questions is No.
Two of the factors advanced by the economic managers for the current inflation—the depreciation of the peso and the upward movement of world oil prices —were already in existence at the end of 2017. Still, the inflation rate was well within BSP’s 2-4 percent inflation target range for 2018.
Things changed—and consumer prices began to start jumping on Jan. 1, 2018, when the first TRAIN (the Tax Reform and Inclusion law) package went into effect. True, it had an income tax component—the exemption from taxation of all annual individual incomes below P250,000—but TRAIN 1 was largely an indirect-taxation measure. The excise taxes on petroleum were increased and new taxes were imposed on a number of goods that included non-alcoholic beverages and sweetened products.
The goods subjected to incremental or new taxes were chosen for their high revenue-generation capacity. From the standpoint of economic management, the most important of these goods are those that (1) are inputs into productive operations or (2) are major components of household budgets. As bunker fuel, petroleum products drive the wheels of industry, as gasoline and diesel fuel make motor vehicles run and as kerosene and electricity keep households going. The national economy’s managers have presented statistics to try and show that the other excise-taxed goods are equally to blame for the rise in inflation, but there can be no denying that the taxes on sales of petroleum products, because of their impact on manufacturing, transportation and household activity, are the principal culprit. I am prepared to wager that if the taxes on petroleum products were reduced or withdrawn altogether, the current inflationary movement would slow substantially, making possible an earlier return to price stability. In sum, what we have here is a fiscal issue, i.e., taxes.
Which brings me back to the successive increases in the BSP’s basic interest rate.
Like all interest rate increases, the August 9 Monetary Board action and its predecessors are expected to affect the current situation on the monetary side. BSP interest rate increases, by tightening the monetary screws, cause interest rates to rise across the banking system and thereby dampen both the consumer and producer demand for goods and services. The inference is that the monetary authorities believe that what is happening is a demand issue and that inflation will go away if the demand for goods and services is pushed downward through an increase in the cost of money.
But the problem is not excessive demand for goods and services. There is no overheating of the economy, and the BSP and the economic managers appear to be in agreement that overheating is unlikely to occur in the foreseeable future. The problem is one of rising costs of goods and services brought about by a fiscal event—TRAIN and its package of excise tax increases.
It wasn’t BSP policies that caused the ongoing inflation; consumer prices were within target inflation range at yearend 2017. All hell began to break loose when TRAIN came into play on Jan. 1, 2018.
Blame for the inflation surge must be placed squarely at the door of the Department of Finance. TRAIN started it all, so let the solution to the inflation lie with TRAIN.