Pause

After inflation numbers plateaued, BSP Governor Felipe Medalla indicated the long sequence of interest rate hikes could be paused. This should be reassuring for those worried the escalating interest rates could stall investments and put our banking system under greater stress.

It takes months for the effects of interest rate increases to work their way through the economy. The sequence of interest rate increases our Monetary Board mandated have yet to take their full measure on our economy. A pause might give us time to assess things.

Our Monetary Board’s decision will, of course, take into account the interest rate decision of the US Fed. If the US Fed continues to hike interest rates, we will have to follow suit – mainly to protect our currency’s exchange rate. The signals from the US Fed, however, favor the likelihood of a pause in its main inflation-fighting tool.

The Philippine economy, says Medalla, in on track to bringing down its inflation rate to the government target range of between 2 to 4 percent in 2024. That is reassuring.

Because of more benign inflation numbers, our economic managers are now assessing the possibility of raising our GDP growth targets. Inflation is a curse on wage-earners. It is also a tax on our macroeconomic growth performance.

Should inflation drop dramatically in the coming months, we could realistically raise our 2023 growth forecasts to over 6 percent. If that happens, the Philippine economy will pace the region in economic expansion. We will, however, have to work with greater urgency on correcting our logistics and supply issues that hinder new investments. Microeconomics is everything.

Too, a major driver of our inflation rate has been price spikes in food products. This is impervious to interest rate hikes. It is a symptom of failure in our agriculture policies.

We have had to import staple agricultural items the past year because of shortages. Supply shortages cause price spikes and therefore push up the inflation rate. Importation, however, can only be a transitional strategy aimed mainly at containing inflation rather than ensuring sufficiency. The revolution in our agriculture has to happen.

Energy prices fuel global inflation. A few weeks ago, the OPEC surprised us by announcing a production cutback of 1.15 million barrels per day. This caused oil prices to spike by about $10 per barrel.

This is not the end of the story. OPEC indicates that another round of cutbacks amounting to another million barrels a day will be forthcoming in May. The oil-exporting countries prefer to see oil prices hovering somewhere close to $90 a barrel.

Energy prices will countervail the softening inflation rate, unfortunately. They remain the major factor pushing inflation at the global level and driving trends towards recession.

The interest rate regime is not the only factor determining the inflation rate. Any new source of uncertainty – geopolitical or financial – will shape inflation prospects more decisively than the actions of central banks.

Pensions

The streets of France have again become a battleground. Rolling strikes and large demonstrations have been called to protest the effort of the Macron government to raise the retirement age from 62 to 64.

It is a cardinal rule in policymaking that a privilege, once given, will take all of hell to withdraw. Years ago, the French government must have harvested a lot of goodwill when it reduced the retirement age. Now it will have to pay with blood to bring up the retirement age to a more sustainable level.

There are some large trends underpinning the decision of the Macron government to dare adjust the retirement age. As the population ages, there will soon be fewer people of working age contributing to the retirement pot while more people draw pensions from it. The actuarial facts dictate an adjustment.

But the mass of citizens benefitting from pensions or expecting to soon benefit from them are not actuarially literate – or prefer not to be. They see the benefits but not the financial process that makes those benefits possible.

It is easy to agitate on the basis of incomplete information. That is politically profitable. This is why we see the French leftist and rightist groups allied in the streets.

Those who now draw pensions or those on the verge of living the life of a retiree see only the benefits. They want the current system to be maintained even if it means that their children will have no pensions to draw when their time to retire comes.

For many Frenchmen, civilizational advance is measured by the shortening of the workweek and shortening of the working lifespan. Macron’s proposed reform of the pension system runs against the grain of what they see as civilizational gains. This reform will require a lot of political will to do what is right – no matter the backlash at the polls.

We have a bit of the same problem in our pension system for military and uniformed personnel (MUP). Over so many years, we have assembled the equivalent of a financial time bomb: with the MUP paying nearly negligible contributions to the fund while retirees enjoy exorbitant benefits – both in the amount of pensions received and the ease with which the pensions could be assigned to surviving family after the retiree dies.

This self-destruct feature of the MUP pension system is magnified by the fact that soldiers retire much earlier and die much later than everyone else. Government is holding on to a trillion-peso pension bomb.