Fiscal interventions needed to stem inflation: economists


Posted at Sep 23 2022 11:21 AM

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MANILA — Fiscal policy interventions are needed to support monetary policy adjustments in arresting inflation as well as the weakening peso against the US dollar, economists said on Friday.

Interest rate hikes and monetary interventions are not enough to cool down rising prices, economist Emmanuel Leyco told ANC. 

The Bangko Sentral ng Pilipinas on Thursday hiked interest rates by 50-basis points to 4.25 percent, which it stressed was mainly to anchor inflation. Inflation slightly eased to 6.3 percent in August but is still above the 2 to 4 percent target.

"You cannot move with just one foot, you have to use both legs of the economy that are available to the government. First is monetary, but there is a limit to what monetary interventions can do. The second is the fiscal interventions. Non-monetary interventions must be in order," he said. 

"Today, the government is discussing next year’s budget and yet the budget looks like it’s business as usual. I think this is the time when we should look at the budget and focus on what are essential. Those that are not essential, those can be deferred," he added.

Leyco said there is demand as proven by car sales, loan growth and credit cards, but consumers are likely to hold back to save.

"I think consumers will now like to hold back on their consumption, defer on car purchases, credit card use because it's going to be a lot more expensive for them to carry the burden of their household debt," he said.

"Looking forward, we can now see the demand coming but the fundamentals that we have been watching — low interest rates, manageable inflation, stable currency — those are all gone now," he added,

In terms of the peso, BPI lead economist Jun Neri said the BSP should rethink its stance on interest rate hikes that is still seen as dovish by many against the hawkish US Federal Reserve that had signaled for more hikes and longer intent to keep rates high.

The peso hit an all-time low of P58.45 on Thursday against the US dollar, with the USD outperforming most of the global currencies due to another big time rate hike announced by the US Fed. 

The US Fed will have another interest rate-setting meeting in November, a few weeks ahead of the BSP. 

"While inflation is the ultimate target [of interest rate hike], the currency is an intermediate target because we all know the weaker peso will have an influence on inflation data," Neri said.

"P60 is just around the corner if we continue to be perceived as dovish, not really trying to catch up with that higher, faster, longer signal of the FOMC [Federal Open Market Committee of the US Federal Reserve]," he said.