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First transformative outcome


By Dr. Jesus P. Estanislao


A central monetary authority is expected to secure and provide for the economy relative price stability. It follows that one of the outcomes of the governance and transformation journey of the Bangko Sentral ng Pilipinas (BSP) should be the delivery of relatively stableprices (and preferably low inflation).

Inflation used to be a real bane of the Philippine economy. In previous decades, such as in the 1980s and early 1990s, the consumer price index in the Philippines almost had a natural propensity to rise at relatively high rates. High inflation, many times exceeding 10% per year, imposed heavy economic burdens on most Filipinos. It necessitated that:

Interest rates should be high as well (to keep real interest rates positive to encourage savings); but high interest rates discouraged and stumped investments in the economy, which needed higher levels of investments that were critical to higher economic growth over the long term.

High interest rates also made it difficult for government to observe fiscal prudence. Under a regime of high interest rates, the national government as borrower had to meet high interest payments for the fiscal deficit which it had to finance through debt.

By a combination of several other deleterious consequences of higher interest rates, economic growth would go lower with high inflation, and indirectly the prospects for better economic opportunities would be darker. At the end of the day, poverty incidence in the country would end up higher.

Against the absolute need to bring down inflation and tame it, the BSP adopted the “inflation targeting framework in 2002.” The framework calls for a “comprehensive, forward-looking, transparent, and accountable conduct of monetary policy.” Note that these are the usual governance elements of “systemic, long-term, participatory, and therefore transparent” monetary policy-making. Moreover, despite the complexity and systemic character of the fight against high inflation rates, the BSP put itself forward as accountable for meeting inflation targets. Such a framework thus fitted like a good “glove to hand” into the Balanced Scorecard framework that the BSP adopted for its governance and transformation program.

Under the inflation targeting framework, the national government itself sets an inflation range for the next two years; and it becomes the responsibility of the BSP to formulate and pursue a monetary policy that would keep actual headline inflation rate within the target. Over the 5-year period up to 2014, the BSP has succeeded in doing so: it has delivered the outcome of keeping actual headline inflation rate within the range set by the Philippine national government.

This specific success of the BSP, in light of previous difficulties of the Philippines to tame inflation and keep it within prudent and manageable bounds, did not escape the notice of international observers. The Asian Banker recognized BSP as “Best Macro Economic Regulator in 2013” for its “disciplined effort to maintain low and stable inflation.” Furthermore, “credit ratings agencies have issued investment grade ratings to the country, while international financial associations recognized such a breakthrough as shown by favourable growth prospects (they) accorded to the (Philippine) economy.

It may be true that the global economic environment these past few years has been characterized by low inflation. Nonetheless, the specific recognition given to the BSP in this regard – to keep actual headline inflation rate within the target – shows that it still stands out in delivering this first transformative outcome.

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