BSP adopts inflation targeting starting this year

Starting this year, the Bangko Sentral ng Pilipinas (BSP) will shift from the monetary aggregate targeting to inflation targeting as the framework for monetary policy.

BSP Governor Rafael Buenaventura said under the new framework, the BSP is committed to achieve the government’s average annual inflation target of five to six percent for 2002 and 4.5-5.5 percent for 2003.

These targets were set by the Development Budget Coordinating Council (DBCC) composed of the Department of Finance (DOF), the Department of Budget and Management (DBM), the National Economic and Development Authority (NEDA) and the Office of the President and the BSP.

Buenaventura said that since 2000, the BSP has been conducting nationwide public consultations with various groups including the government, academe, banking community, the private sector and the media process will continue in the coming year, he added.

Previously, there were concerns the BSP might delay the implementation of its shift to inflation targeting as its framework for monetary policy until 2003 because of the uncertainty brought about by the global and domestic economic downturns.

Sources said several members of the DBCC questioned the timing of shift to inflation targeting, given the current economic uncertainty.

"Some of them cited the importance of credibility in policy-making, noting that establishing credibility is difficult in unstable periods. Most countries shifted to inflation targeting only during stable times," the sources said.

The approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. The target inflation rate will be set and announced jointly by the BSP and the DBCC, although the responsibility of achieving the target will rest largely on the BSP.

The BSP wants to shift to inflation targeting because it is easier understood by the public and allows a greater focus on the goal of price stability.

Also, it reflects a comprehensive approach to policy by taking into consideration the widest set of available information about the economy.

BSP which will target headline inflation, is also supposed to monitor core inflation trends.

It has adopted several procedures to ensure accountability and transparency wherein BSP and DBCC will announce the targets and instruments change.

In case of a breached budget, BSP will submit a letter to President Arroyo explaining reasons for the breach. The BSP will also publish minutes of Monetary Board meetings with policy changes to ensure attainment of inflation targets, and an advisory committee to the MB will be assigned composed of the BSP Governor, Deputy Governor for research and treasury, mana-ging director, department of economic research director and treasury director.

Under the current monetary framework, the Philippines defines its inflation target in terms of headline inflation, or the annual growth of consumer price index. However, a shift to inflation targeting will require a closer examination of which price variable to target since greater accountability for meeting this target will be lodged with the BSP.

Inflation targeting is seen to improve transparency since the public would have a quick access to how the inflation target is being drawn and how the BSP was able to come up with such target through internet.

Unlike a pure monetary targeting framework where the focus is solely on money, the BSP has adopted measures that put relatively more emphasis on its inflation objective and has broadened the information set that is used to guide monetary policy to include indicators of economic activity, among others.

But sources said while these are clear advantages, the BSP still has to address other concerns, including the choice of an inflation target; the development of a reliable inflation forecasting model; and the lack of a strong case for an immediate shift to inflation targeting.