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Transcript
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 6 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. 11 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” 16 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 17 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 18 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 21