Download ESCAP High-level Policy Dialogue

 ESCAP High-level Policy Dialogue
Ministry of Finance of the Republic of Indonesia International Economic Summit 2013
Eleventh Bank Indonesia Annual International Seminar
“Macroeconomic Policies for Sustainable Growth with Equity in East Asia”
15-17 May 2013, Yogyakarta, Indonesia
Jointly organized by
UN ESCAP, Ministry of Finance of the Republic of Indonesia and Bank Indonesia
Session 2 – Managing Inflationary and Balance of Payment Pressures
Presentation
The Experience of the Philippines
By
Cyd N. Tuano-Amador
Assistant Governor, Banko Sentral ng Pilipinas
May 2013
The views expressed in the paper are those of the author(s) and should not necessarily be considered as reflecting the
views or carrying the endorsement of the United Nations. This paper has been issued without formal editing.
Session 2: Managing inflationary and balance of payment pressures—some discussion points
ESCAP High‐Level Policy Dialogue and 11th Bank Indonesia Annual International Seminar
Yogyakarta, Indonesia
15‐17 May 2013
Ma. Cyd N. Tuaño‐Amador
Monetary Policy Sub‐Sector
Bangko Sentral ng Pilipinas
Some issues for discussion
1. Is monetary tightening appropriate for inflation induced by supply bottlenecks?
2. How is monetary easing in advanced economies affecting East Asian economies? 3. What have been the policy responses of capital‐
receiving countries to the surge in capital inflows? 2
Inflation pressures have been subdued
 Near‐term outlook for commodity prices indicate broad declines across major commodity groups against backdrop of weaker activity and declining global commodity prices
 But this is an evolving situation: inflation dynamics could reverse
Global Inflation
(Year‐over‐year % change)
Philippines
Headline and Core Inflation (2006=100)
January 2007 ‐ March 2013
14
Headline Inflation
Core Inflation
12
10
8
6
4
2
0
'07
'08
'09
'10
'11
'12
'13
3
How should central banks deal with commodity price‐led inflation pressures? Is monetary tightening appropriate for inflation that is induced by supply bottlenecks?  Challenging for countries where commodity prices have stronger & longer‐lasting effects on inflation since food & energy account for a large share of CPI basket & where pass‐
through from global commodity prices is higher
 CBs typically accommodate first‐round effects as these price pressures lead to relative price shifts, without affecting underlying inflation trends
 CBs respond to second‐round effects to minimize impact on inflation expectations, which would be factored into wage & price‐setting processes
4
Dealing with inflation that is induced by supply bottlenecks
 Policy response depends on:
1. Source of shock ‐ Commodity price changes driven by demand factors are often more persistent and likely to have larger second‐round effects‐‐calls for more aggressive policy response; degree of tightening & timing depend on how much changes in policy settings slow down aggregate demand & on lags with which monetary policy affects behavior of economic agents
2. Persistence of the price spike
 CBs typically would not react to short‐term spikes in headline inflation
 Long‐lasting commodity price swings are propagated to core inflation and inflation expectations – calls for a policy response from CBs
 Tests of persistence shows commodity inflation tends to be protracted, with food inflation being more persistent than fuel inflation
Impulse Response of Headline Inflation to Shock in Fuel, Rice and Food Inflation
.0020
.0016
.0012
.0008
.0004
.0000
-.0004
1
2
3
4
5
Fuel
6
7
Ric e
8
9
10
11
12
Food
5
Asia: Pass-Through from Global Energy
Prices to Domestic Food & Energy Prices
3. Pass‐through/second‐round effects on wages and prices
(in percentage points)
 Prolonged surges in food and energy inflation can spread to other goods & core inflation – risk & strength of transmission depend on length of period of high CPI outturns Impact of a 10 percent increase in global energy
prices obtained from regressions of domestic
food and energy prices on current and lagged values
of global prices in domestic currencies and
output gaps (April 2012 IMF REO
4. Credibility of CB in combating inflation
 If policy credibility is strong, only small adjustments in monetary policy needed as price setters are confident about inflation‐
fighting credentials of CB so medium‐term inflation expectations remain well‐anchored, reducing resultant fluctuations in economic activity
 If policy credibility is weak, inflation expectations could be dislodged by news of commodity price pressures
 Central bank communication is important
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How is monetary easing in advanced economies affecting East Asian economies?
 Prolonged period of low‐interest rate policy & quantitative easing/unconventional monetary policies have led to surges in capital flows to emerging markets
 Capital inflows to emerging Asia are likely to remain buoyant, in light of both push factors (easy monetary conditions in advanced economies & reduced risk aversion) and pull factors (growth and return differentials vis‐à‐vis advanced economies, as well as resilience & better economic prospects) 7
More capital flows expected for EMEs…
Emerging Asia receiving half of flows
Source: Institute of International Finance, 2013
8
Benefits of capital inflows are well known…but so are the risks.
Benefits of favorable external financing conditions (e.g., reduced borrowing costs & wider range of financing sources):
 Support growth in capital‐receiving economies
 Contribute to development of domestic financial markets
 Monetary easing by US Federal Reserve & other central banks has helped moderate economic downturn in their economies
9
Risks: could challenge economy’s capacity to absorb flows Prolonged accommodative MP conditions could lead to vulnerabilities & potential build‐up of instabilities…
 Stoke inflationary pressures (though not much of a concern at the moment)
 Lead to asset price misalignments/frothiness
Asia Financial Stability Heat Map
 Induce risky lending, balance sheet mismatches & high leverage
…thus can undermine financial stability & harm economic growth
10
Annual actual values compared to the average deviation to trend of
Philippine-specific non-crisis years
Less than 0.5 standard deviation
Greater than or equal to 0.5 but less
than 1.5 standard deviations
Greater than or equal to 1.5 standard
deviations
Financial indicators
Real Credit NDC-to-GDP Real House
Real Office Real Share
Growth*
Price Growth Price Growth Price Growth
2008
2009
2010
2011
2012
*The indicators for credit growth, house price growth, and share price growth refer to the latest 2012 values relative to 1997,
2000, 2002-2006 average of output growth.
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Reversals could be quite costly
Unwinding of accommodative policies & subsequent tightening of monetary conditions in advanced economies: EMs CBs must give due consideration to exit strategies
 Possible interest rate hikes/shocks in developed markets could raise debt servicing cost & lower asset valuation
 Ensuing depreciation of domestic currency could raise debt servicing cost and impinge on expenditure plans of firms/government  Froth created by easy money could foment bubbles that burst, causing instability/disruptions in financial markets
 Credit crunch
12
Policy responses can be quite challenging…
Sterilized foreign exchange intervention keeps domestic interest rates high and feeds the inflows, but unsterilized intervention and/or reducing domestic rates creates excessive liquidity that can feed domestic inflation and/or asset and credit bubbles. At the same time, forgoing intervention and allowing the currency to appreciate erodes external competitiveness, leading to dangerous external deficits. Yet imposing capital controls on inflows is difficult and sometimes leaky. Macroprudential controls on credit growth are useful but sometimes ineffective in stopping asset bubbles when low interest rates continue to underpin generous liquidity conditions. (Roubini, RGE Monitor, 2013)
BSP’s use of a menu of policies is therefore the pragmatic response.
•Exchange rate flexibility
•Intervention with sterilization
•Liberalization of foreign exchange outflows
•Capital flow management measures
•Macroprudential measures
13
Challenges in implementing macroprudential policies
 While there are many responsible adults in the room that can see to it that the party does not get out of hand, many responsible adults wanting to do a number & a variety of things can also have unintended consequences
14
Clear assignment of tools to policy objectives  Monetary policy is focused on safeguarding price stability & macroprudential instruments are used to deal with financial stability risks to contain potential systemic risk build‐up arising from rapid credit growth  However, BSP is mindful that there are important complementarities and linkages between the two set of policies.
15
SDA Rates, Bank Average Lending Rate and RRP Rate
(2000‐2013; in percent)
Growth of KB Lending
January 2003 ‐ March 2013
28.0
KB Lending Growth (net of RRPs)
24.0
Trend
Percent
20.0
16.0
12.0
8.0
4.0
2003M01
2003M04
2003M07
2003M10
2004M01
2004M04
2004M07
2004M10
2005M01
2005M04
2005M07
2005M10
2006M01
2006M04
2006M07
2006M10
2007M01
2007M04
2007M07
2007M10
2008M01
2008M04
2008M07
2008M10
2009M01
2009M04
2009M07
2009M10
2010M01
2010M04
2010M07
2010M10
2011M01
2011M04
2011M07
2011M10
2012M01
2012M04
2012M07
2012M10
2013M01
0.0
‐4.0
‐8.0
 BSP has kept policy interest rates unchanged given favorable (within‐target) inflation outlook
 There is a risk that additional liquidity could feed asset prices (due to lags in absorptive capacity of economy)  Macroprudential policies already in place (ex ante) help contain
risk‐taking by financial intermediaries
 Current challenges “need two blades of the scissors to cut”
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What is the role that should be given to macroprudential policies to moderate volatile capital flows?  Well‐designed ex ante macroprudential policies have been useful part of toolkit of the BSP
 Appropriate macroprudential policies:
 Create additional room for maneuver for monetary policy in the face of surging & volatile capital flows
 Help offset undesirable side effects such as when monetary tightening can induce policy dilemma of bringing in more capital
inflows & where scope for sterilized exchange rate intervention is limited by already high levels of reserves & costly interest rate differentials
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BSP has resorted to broader range of macroprudential measures
Measures include: Curbs on FX derivatives & derivative positions
Restrictions on access to Special Deposit Account Facility by non‐residents
Single borrower’s limit
Property sector:
Limits on loan‐to‐value
Expanded definition of concentration limit/broader coverage of RE lending
…but BSP is mindful that there are challenges as well…
 Migration of systemic risk to other parts of financial system
Strong regulatory framework is essential, along with high‐quality supervision
Data gaps
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Session 2: Managing inflationary and balance of payment pressures—some discussion points
ESCAP High‐Level Policy Dialogue and 11th Bank Indonesia Annual International Seminar
Yogyakarta, Indonesia
15‐17 May 2013
Ma. Cyd N. Tuaño‐Amador
Monetary Policy Sub‐Sector
Bangko Sentral ng Pilipinas
How do monetary policy & macroprudential measures affect each other?
 Experience & knowledge on the interaction of monetary policy & macroprudential measures still limited
 But fear of policy errors should not be a cause for inaction as it can have serious consequences  In responding to current economic challenges, BSP draws on whole policy envelope & exploits complementary relationship between monetary policy & macroprudential measures: BSP is both monetary authority & banking system supervisor
20
Uneven recovery in global economy
Source: IMF World Economic Outlook April 2013
Real GDP, year‐on‐year percent change
21
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