Magazine article Global Finance

Keeping Inflation under Control

Magazine article Global Finance

Keeping Inflation under Control

Article excerpt

The government tightened money supply in 1996 to beat back a threat to its stabilization programs.

The 1996 yearend report from Bangko Sentral ng Pilipinas (BSP) shows that the country was able to sustain an accelerating GNP growth rate, driven mainly by investments and exports, while pulling inflation back from the doubledigit annualized level of the early part of the year. This result gains further significance in the light of economic trends elsewhere in Southeast Asia, where the pace of expansion is slowing.

Dealing with the threat of renewed inflation was the major policy challenge for the government last year. Temporary supply problems with rice-a major commodity that has a heavy impact on the consumer price index-sparked inflation fears early in the year. The policy challenge, orchestrated primarily by the BSP, was to persuade the public not to give in to a crisis of confidence that would have undermined the overall anti-inflation program. Having correctly identified the problem, the government moved quickly to ease it-mainly by importing rice and resolving distribution snags.

By tightening money supply to well below budgeted levels, the BSP was able to prevent consumers from acting on inflation fears. The key to success, however, was to do that without overcooling the economy, driving interest rates too high, or causing the peso to appreciate. Base money growth was slowed to less than 14% for the year-by October 1996and monthly rates declined steadily throughout the year. Thus, average annualized inflation slowed to just 5. …

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