A delay in raising interest rates risks allowing Iran war-driven inflation to spread to other essential consumer goods, New York-based GlobalSource Partners said, urging the central bank to stay ahead of the curve to avoid the consequences of acting too late.
In a commentary, Diwa Guinigundo, an analyst at GlobalSource, argued that a quarter-point rate hike at today’s Monetary Board meeting is essential to anchor inflation expectations.
‘A measured but firm response is warranted,’ said Guinigundo, a former deputy governor at the Bangko Sentral ng Pilipinas (BSP). ‘The cost of acting late will far exceed the cost of acting now. Monetary policy must move ahead of the curve, not behind it.’
Ten of 16 economists polled by the Inquirer expect the central bank’s policy-setting Monetary Board to lift the benchmark rate by a quarter point to 4.5 percent at its April 23 meeting. The rest see policymakers keeping the rate at 4.25 percent.
If carried out, the increase will mark the first tightening move since October 2023, back when the BSP raised borrowing costs in an off-cycle decision after food prices had pushed inflation above 6 percent.
Higher borrowing costs are intended to prompt households to rein in spending, easing demand-driven price pressures but also cooling economic activity.
However, the Philippines-the first country to declare a national energy emergency amid Middle East turmoil-is grappling with supply-driven inflation. The central bank has acknowledged that such challenges are not best addressed through interest rate hikes, which could also delay economic recovery from a confidence shock.
Inflation woes
Already, inflation rose to a near two-year high of 4.1 percent in March, edging past the central bank’s 2-percent to 4-percent target range. This was as limited government support to battered households allowed higher energy prices to spill more quickly into other goods.
Despite the limits to monetary policy, analysts have said raising rates could help anchor inflation expectations. The objective is to prevent a ‘second-round’ inflationary spiral, where consumers and businesses begin to expect indefinite price hikes and adjust their behavior accordingly by demanding higher wages or raising selling prices.
‘While initial shocks were supply-driven, the window to preempt second-round effects has narrowed,’ Guinigundo said. ‘Delay now risks embedding inflation further into wages, contracts and expectations.’