Policy balancing act seen needed to avert stagflation

By Justine Irish D. Tabile, Senior Reporter

THE PHILIPPINES risks slipping deeper into a “stagflationary” environment if monetary, fiscal, and structural policies fail to work in sync, an analyst said.

“Balancing inflation control with growth in this kind of environment is tricky because the usual tools pull in opposite directions,” Ser Percival K. Peña-Reyes, senior research fellow at the Ateneo Center for Economic Research and Development, said via Facebook Messenger.

“Tightening too hard can choke growth; easing too soon can entrench inflation,” he added. “The goal is to cool prices without crushing demand, and that requires a mix of monetary, fiscal, and supply-side actions working together.”

Mr. Peña-Reyes said the country is already showing early signs of stagflation following stronger-than-expected inflation last month, reflecting the need for a well-coordinated and targeted policy response.

The consumer price index (CPI) accelerated to 7.2% in April, well above the central bank’s 5.6%-6.4% forecast for the month. It had been 4.1% in March and 1.4% a year earlier.

The Bangko Sentral ng Pilipinas (BSP) said on Wednesday that it is ready “to take all necessary monetary actions to ensure inflation returns to the 3% target.”

Prior to the release of the April CPI, the BSP had already hiked its key rate for the first time in over two years, bringing the benchmark rate to 4.5%.

However, Mr. Peña-Reyes warned of policies working at cross-purposes: “If fiscal policy overstimulates while BSP tightens, it will be inefficient and painful. If both tighten too much, it will lead to unnecessary slowdown.”

A BusinessWorld poll of 21 economists and analysts last week yielded a median estimate of 3.4% for the gross domestic product (GDP) growth in the first quarter.

If realized, GDP growth would be weaker than the revised 5.4% expansion from a year earlier and lag the government’s 5-6% target for year. First-quarter GDP data will be released on Thursday, May 7.

A study by the Philippine Institute for Development Studies (PIDS) said fiscal measures should directly address the channels through which external shocks are felt, particularly inflation and household demand, rather than rely on broad-based interventions.

“The appropriate policy response for the Philippines is not a broad-based intervention, but a targeted, consumption-focused, and time-bound fiscal strategy,” PIDS said in a discussion paper.

The think tank noted that the Philippines’ status as a net oil importer makes it vulnerable to global crude price swings, which have driven up domestic fuel, food, and utility costs.

“Given the Philippine economy’s high sensitivity to consumption shocks, policy should prioritize protecting household purchasing power rather than suppressing prices across the board,” PIDS said.

In particular, the think tank recommended the deployment of targeted, calibrated transfers and subsidies, such as fuel vouchers, transport subsidies, and cash assistance.

“Broad-based measures, such as universal fuel subsidies or across-the-board price controls, should be avoided, as they are fiscally costly, weakly targeted, and may dilute incentives for energy conservation and adjustment,” it added.

PIDS also recommended expanding temporary and targeted social protection programs with support triggered by inflation or fuel price thresholds and focused on the most affected sectors.

At the same time, it urged the government to safeguard investments in transport connectivity, supply-chain efficiency, and energy security even under fiscal pressure.

“Fiscal consolidation, where needed, should come from reprioritization and efficiency gains, rather than cuts to growth-enhancing expenditures that are essential for recovery and long-term competitiveness,” it said.

The think tank also cautioned against sweeping fuel tax cuts, saying any adjustments “should be temporary, targeted, and carefully calibrated, with clearly defined exit strategies.”

Rising fuel costs and dwindling reserves pushed the government to declare a one-year state of national energy emergency and suspend excise taxes on kerosene and liquefied petroleum gas.

Mr. Peña-Reyes said the best outcome is expected to emerge from a coordinated policy mix, with monetary policy anchoring inflation, fiscal policy providing targeted relief, and structural measures easing supply constraints.

“These policies in combination should be tight enough to break inflation, but smart enough not to break growth,” he said.

“If inflation gradually returns toward target, growth slows but stays positive and stable, employment holds up, and investment does not collapse, then that’s the ‘soft landing’ scenario that policymakers would want to happen.”

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the country is in a “stagflationary quagmire,” with limited fiscal space constraining the government’s response.

“What matters now is how policymakers — particularly the BSP — responds. I say the BSP, because the government has very little wiggle room, with the budget deficit still elevated vs. pre-COVID rates, as a percentage of GDP,” he said in an e-mail.

He said that the BSP took a measured approach at the onset of the crisis, noting that monetary policy had little to no effect in dealing with supply-side inflation shocks.

“I think this still is the case, in that the threat of this shock spreading to persistent demand-side pressures is slim to none, given how weak the economy already is,” he said.

“But I’m afraid the BSP will overreact and tighten monetary policy further in response mainly to what we think will be a temporary breach of its inflation target range,” he added.

Mr. Chanco said his baseline view sees inflation easing and returning to below 4% next year.