Stagflation Ahoy: BSP Drops ‘Transitory’ Expects High CPI in 2021; Low Rates and Strong Peso Façade at Risk?

 

I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind—Friedrich von Hayek 

 

In this issue 

 

Stagflation Ahoy: BSP Drops ‘Transitory’ Expects High CPI in 2021; Low Rates and Strong Peso Façade at Risk? 

I. Stagflation Ahoy! BSP Drops Transitory, Sees the CPI hit the Ceiling of their Target on Yearend! 

II. Will Surging Street Inflation Upend the Low Rates, Strong Peso Façade? 

III. How the Lockdown Socialism Compounds on Existing Imbalances in the Banking System?  

IV. Higher CPI Exposes the Fragility of the Banking System 

V. Stagflation’s Dramatic Impact on the Economy Through Banks 

 

Stagflation Ahoy: BSP Drops ‘Transitory’ Expects High CPI in 2021; Low Rates and Strong Peso Façade at Risk? 

 

I. Stagflation Ahoy! BSP Drops Transitory, Sees the CPI hit the Ceiling of their Target on Yearend! 

 

Well, that was fast!  

 

(all emphasis—bold, italics and or underline—on article clips are mine) 

 

From the Philstar (February 11): The decision to maintain monetary policy echoed Diokno’s pronouncements last month as well as that of Monetary Board member Felipe Medalla few days ago, and appears to balance the need to keep a weakened economy liquid, while avoiding to fan inflation that already hit a 2-year peak of 4.2% because of tight food supply. Indeed, Diokno on Thursday dropped the word “transitory” from his official statement, saying that prices are now expected to remain “elevated” in the next few months. Yet ultimately, he said inflation should settle within the 2-4% target this year. It will, as per BSP’s latest forecast, but only to hit the ceiling of 4% by yearend. “The balance of risks to inflation outlook now appears to be broadly balanced,” Diokno said. In at least previous three meetings, BSP saw “downside” risks to inflation which essentially meant price increases would have been tamer than forecast. 

 

Not only has the transitory been suddenly dropped from the communique, but the BSP’s honchos now see the CPI hit the ceiling of their targeted range at the yearend! Amazingly, this leveling up of the inflation target resonates with last year’s drastic downgrades of its GDP forecasts. 

 

And it’s only February! 

 

This week’s events show why the BSP foresees a prolonged uptick in inflation. 

 

First, the Pork Holiday. 

 

Inquirer (February 9): Malacañang on Monday appealed to meat retailers to resume selling pork as it assured them of government assistance and enough supply of pork for Metro Manila consumers. Presidential spokesperson Harry Roque said the government would bring pork free of African swine fever (ASF) from Mindanao, the Visayas and parts of Luzon to the capital region and would offer hog raisers transport subsidies to bring down farm-gate prices. Traders and vendors refrained from selling pork and chicken to protest President Duterte’s imposition of a 60-day freeze, starting Monday, on the prices of those meats in public markets and supermarkets in Metro Manila to stem their soaring prices. 

 

Avoiding to sell at an economic loss that inflicts personal suffering to please the government’s fetish for controlling prices are called protests? Really? 

 

Next, the proposed solutions. 

 

To solve the supply problem in the NCR, national authorities have been promising to send surplus stock from provinces in the South. But of course, doing so means that the same provinces will be at risk of incurring shortages. That’s because those surpluses are intended only for local demand.  

 

And so the pushback from some of the Local Government Units. 

 

Philstar (February 9): The Zamboanga City government on Tuesday called on the Department of Agriculture regional office to require meat suppliers to retain 50% of their stocks for local use because shipments of meat outside the region has lowered supply and caused prices to go up. 

 

Inquirer (February 10): The transport of hogs and pork meat outside of the island province of Marinduque has been temporarily prohibited to protect local swine industry and market during the coronavirus disaster (COVID-19) pandemic. On Tuesday, Governor Presbitero Velasco Jr. issued Executive Order 03-2021 ordering the temporary moratorium on outside shipment of hogs, pigs and/or pork meat “to address the possibility of food shortage and ensure adequate and sufficient supply of pork meat within the province of Marinduque during the period of pandemic and the wide disparity in market prices.” 

 

And to affirm this, some hog producers think that the shifting of supply from the provinces to the metropolis represent publicity stunts.  

 

From ABS-CBN News (Translated by Google to English, February 11): “It will be recalled that the government imposed a price ceiling on the prices of pork and chicken to prevent their prices from rising. At that time, the price of pork reached P400 in the markets due to the shortage allegedly caused by the effects of African swine fever.  To alleviate this, the DA has promised to "help" 10,000 pigs per week. But hog raisers denied it. "When there is a surplus, it will actually be sent to Luzon. That is the most support there. But the 10,000 weekly coming from the group of GenSan, or Koronadal Region XII, it seems like that is not possible," said Tan.  "That is just a press release so maybe it will scare the pigs in Luzon but we know very well because the people he talked to there are members of ours in South Cotabato, General Santos. So no, that will not happen," he added.  

 

And as political desperation mounts, authorities expand price controls on provincial shipments to NCR that exacerbate supply strains.  

 

Businessworld (February 11) THE Department of Agriculture (DA) has set maximum prices for the landed cost of hogs shipped to Metro Manila from farms across the country, in order to keep a lid on high pork prices and avert another inflation crisis. In a memorandum order, Agriculture Secretary William D. Dar said once additional hogs contracted on an emergency basis arrive in Metro Manila via subsidized transport, the landed cost of hogs from Mindanao will be capped at P165 per kilogram. Those from the Visayas, Bicol, MIMAROPA, Ilocos Region, and Cagayan Valley can command P170. The ceiling on Central Luzon and CALABARZON hogs is at P180. 

 

As stated last week, one thing leads to another. 

 

Because price controls are doomed, expect a broader expansion of government interventions. Or, price controls tend to beget price controls, which ultimately may lead to (old-school) socialism. 

 

Stagflation, Ahoy: January CPI Accelerates, Price Controls and QE to Fuel Higher Inflation, Treasury Markets AgreeFebruary 7, 2021 

 

And there’s more. 

 

CNN (February 9): The government is setting a wholesale price for pork products sold to public market vendors in Metro Manila to ensure that retailers are able to comply with the price ceiling set. “Iyong wholesaler… [magbenta sila] hanggang ₱235 [per kilo] pwede na,” Agriculture chief William Dar said in a briefing. “Iyon ang wholesale price cap na natin para hindi na masyaong mataas ang ibibigay ng wholesaler o biyahero doon sa meat vendors.” [Translation: The wholesalers can sell up to ₱235 per kilo. That is our wholesale price cap so that the price to be passed to meat vendors will not be high.] 

 

The government’s solution is to centralize everything! 

 

And since people require food for survival, they don’t need to be told by authorities that there are substitutes for high priced items.  

 

Prices are enough to guide them to make such choices. 

 

As the Nobel Prize winner Austrian economist Friedrich A. Hayek said 

 

The important question is to explain how the interaction of a great number of people, each possessing only limited knowledge, will bring about an order that could only be achieved by deliberate direction taken by somebody who has the combined knowledge of all these individuals. However, central planning cannot take direct account of particular circumstances of time and place. Additionally, every individual has important bits of information which cannot possibly be conveyed to a central authority in statistical form. In a system in which the knowledge of relevant data is dispersed among millions of agents, prices can act to coordinate the separate actions of different individuals. 

 

Friedrich A. Hayek, A Conversation with Professor Friedrich A. Hayek (1979) Wikiquote.org 

 

And unless there are sufficient surpluses, price pressures are likely to diffuse into other agricultural products as excess demand corrode on its marginal surpluses.  

 

And once street inflation spreads, will authorities impose price controls to cover more and more food items? 

 

Will the sustained and deepening series of price controls lead to the nationalization or quasi-nationalization of the food industry?  

 

Will the Philippine government pursue the path of Venezuela, where rampant national food shortages (from price controls and hyperinflation from intensive printing money) have prompted some of the citizenries to resort to eating pets and to calamitous rationing? 

  

And sure, some producers and traders had to sell after the ‘pork holiday’, but that’s because there were faced with Hobson's choice of absorbing substantial margin cuts or face severe losses. 

 

From the GMA-7 News (February 10): According to Darlene Cay’s report on “24 Oras,” hog raiser Rene Ramirez said the pork supply of hog raisers was cut in half but the price of raising hogs remained high. He said hog raisers had yet to completely recover from impact of the African swine fever. “Marami ang tumigil, marami ang nalugi, marami ang talagang nag-suffer. So bilang hog raisers din, hindi din kami makapagpadami kasi natatakot din ako,” Ramirez said. Ramirez said he tried to sell a hog to dealer Randy Tanael for P200 per kilo of live weight but had to cut the price to P180. He said that he was forced to do so as the hogs might become oversized if they remained unsold. “Kailangan ko nang dispose talaga ‘yung mga baboy na iyan. So, wala, I have no choice. Kailangan ko na ibigay talaga,” Ramirez said. They agreed on selling each live hog for P180 per kilo. Ramirez said a whole hog would sell for P18,000 but with the cost of feeds, maintenantce, labor, medicine, and permits, the amount, he said, was only “almost break-even.” 

 

This account doesn’t include the cost of labor and money.  

 

Would the same trader reinvest his proceeds under uncertain conditions where the risks of losses are greater than the prospect of gains? If the answer is no, what then is the use of extending public loans (Php 27 billion) to them? Bury them with debt? Also, how will supply be augmented when the affected industries suffer from the same dilemma?   

 

But the impact is asymmetric.  

 

Some businesses have alternatives, like those that sell a variety of items such as supermarkets or groceries. By shifting the burden of increases of pork and chicken prices to the OTHER items not covered by regulations, they can elude price controls. The bigger the firms, the more flexible. Hence, price controls discriminate against the small-medium scale enterprises and promote monopoly or cartelization favoring the elites.  

  

In effect, the material changes in consumer choices in the face of shortages or higher prices of pork and chicken will be met by higher selling prices due to increased demand and also from internal transfer pricing. 

 

But this scheme can last only until producers remain viable to provide supplies to the food retail industry.  

 

I am not alone, even some of the mainstream experts and former officials have joined my camp. 

 

Inquirer (February 10) Economists are wary that the government’s insistence on enforcing price ceilings for pork may lead to higher food inflation and bite the economy in the long run, stressing that the measure may push producers and retailers out of business and lead to rising prices of other agricultural products on the market. They fear that the current pork shortage will add pressure to the government’s efforts to keep inflation at 2 to 4 percent this year. Last month, inflation rose to a two-year high of 4.2 percent, due largely to exorbitant pork prices…According to Ernesto Pernia, the country’s former chief economist, price ceilings will eventually lead to the government handing out aid like this that will eventually hit the economy. He noted that the government was already spending more than what it was earning, and with the coronavirus-fueled recession, raising revenues would be a challenge. “This is not a good idea,” Pernia said in a phone interview. “Somebody will need to pay for the difference [in the price ceilings against the farm gate]. If the government shoulders it, it would result in a bigger government deficit, which is already high.” For Mapa, the subsidy program may work for now, but noted that “shortages are always best addressed by increasing supply.” 

 

There is no free lunch.  

 

Higher fiscal deficits, and consequently, higher taxes and or inflation will emerge from the lifeline of subsidies, mandated loans, and other forms of interventions including partial or full nationalization. 

 

And it is interesting to see a different perspective from those who used to be in power. 

 

Again, authorities have also considered substantially increasing imports to ease supply issues. 

 

But then, bureaucratic barnacles have hobbled the decision-making process.  

 

From the Interkasyon (February 9): “We have a potential deficit of almost 400,000 metric tons, so we need supply augmentation,” Dar said. The plan is still subject to a review by a Cabinet panel before it is recommended for final approval by President Rodrigo Duterte. 

 

So while people suffer, authorities take their time to flex their power over the citizenry. 

  

Yet, a crisis has been declared by the piggery and poultry producers. 

 

However, the National Government continues to go headstrong on them even as losses have spread to ancillary industries as small-scale eateries and Lechon dealers. Heading towards the Chinese New Year, prices of Lechon surged by Php 3,000!  

 

Battered by the lockdown socialism, the extended volatility of food prices will likely pummel the food industry leading to the further corrosion of the spending power of consumers! 

 

And so emerges the second-order ramifications of the lockdown socialism, which will not be captured by econometric models.  

 

Nonetheless, this series of events may have prompted the likely change in the economic inclinations of the higher echelons of the BSP. 

 

And aggrieved parties will be accorded little room for appeals. 

 

The request by the food industry for a summit has been granted by the Department of Agriculture. Unfortunately, the DoA scheduled it for April 7 to 8, which falls at the close of the 60-day price control period. 

 

Stagflation, ahoy! 

 

II. Will Surging Street Inflation Upend the Low Rates, Strong Peso Façade? 

 

Actions at the main street will ultimately be reflected on the financial markets.  

 

Figure 1 

 

In the past, undulations of the CPI has resonated with trend changes of the 10-year PSA Treasury yield and the USD-Php. That is, a rising yield and a weaker peso were manifestations or symptoms of the inflation woes.  

 

However, a stunning divergence has surfaced from recent developments: the peso and treasury yields unaffected by the CPI! (Figure 1, upper and middle window) 

  

It’s a supply-side problem. And so justified the consensus on the recent strength of the peso and low yields. But that would be omitting the record QE by the BSP in 2020 as part of the historic Php 2 trillion liquidity injection program that has been reflected in the banking system’s record cash reserves, not to mention the recent spike in money supply growth.  

 

At any rate, surging CPI, which attempts to proximate street inflation, still shows the massive erosion of the purchasing power of the peso.  

 

While it may be true that the US Fed has been inflating the USD by much more, as the world’s foremost currency reserve, it still commands the advantage of seigniorage or the foreign currency reserve. 

 

The BSP appears to have pegged the peso to the USD on a tight bandwidth and thus has traded in a very narrow range of Php 48 to 48.1 since early December 2020.  

 

As discussed elsewhere here, to maintain its strength, the BSP appears to have amassed enormous short USD positions through short-term repos, derivatives (as FX swaps), and other short-term credit transactions with the US banking system, aside from the rapid accumulation of the USD debt on the national level. The BSP must have included the banking system’s FX deposits as part of its reserves, which it has used for such transactions. 

 

On the other hand, the massive liquidity infusions have likely pulled lower the yield of the 10-year Philippine treasuries.  

 

To stave-off mounting credit issues plaguing the banking system, the BSP engineered the strength of the peso and lower treasury yields as part of its easing program.  Manipulated prices don’t reflect the actual demand and supply conditions of these securities, therefore at the risk of disorderly adjustments.  

 

If I am not mistaken, such tools intended to embellish the macroeconomic picture is about to crumble. The façade is about to wither.  

 

Figure 2 

 

Not only has a spike occurred in the yield spread of the BVAL 10-year references, but yields of the 10-year treasury have soared during the last two days of the week. (Figure 1, lowest pane, Figure 2 upmost window) 

 

Once those yields climb significantly higher, the USD-Php will likely follow.  

 

By extension, soaring inflation expectations in the US have pulled higher yields of its 10-year US treasury note (UST). (Figure 2 middle pane)  

 

The path of the same UST benchmark yield and the local counterpart bears a close correlation. (Figure 2, lowest pane) That said, sustained increases in yields of USTs will escalate the strains on Philippine treasuries, already emitting signs of burdens from escalating inflation. 

 

Remember, higher rates have not been on the radar screen of the consensus! 

 

So while higher yields may prompt the BSP to douse it with even more liquidity, its leakage should fuel more price instability on the main street.  

 

The statistical fat tails are in their feedback loops! 

 

III. How the Lockdown Socialism Compounds on Existing Imbalances in the Banking System?  

 

As previously stated, four interconnected and interdependent factors will shape the economy. 

 

These are the direct impact of the lockdown socialism, its indirect consequences, the ramifications of the bailout policies, and lastly, the business cycle. 

 

The Historic 2020 Recession Eradicated Nearly 3-Years of PER Capita GDP and Household Gains! Recession to Extend in 1Q 2021, says the NEDA! January 31, 2021 

 

From the Businessworld (February 10): SOURED LOANS held by big banks edged lower in December, reflecting the impact of a temporary grace period for borrowers affected by the coronavirus disease 2019 (COVID-19) pandemic. Analysts, however, warned banks will see a steady rise in bad loans in the coming months as relief measures expire and borrowers continue to struggle with debt repayment amid the crisis…A one-time 60-day loan grace period was mandated under Republic Act No. 11494 or the Bayanihan to Recover as One Act. However, the law expired on Dec. 31, 2020, which means borrowers will have to resume repayments or incur penalties.  

 

The statistics of the banking and financial system barely reflect the actual conditions because of the flurry of distortions from the massive interventions designed to rescue the banking system. 

 

As stated last September 

 

And it’s also why the BSP used the Bayanihan 2.0 to impose a deferment in amortizations or installments that, in their hope, may buy time for the economy to recover, thus, improving the payment capacities of borrowers. 

 

However, the BSP recognizes the cost of its policy. 

 

By expanding liquidity through another round of QE on National Government liabilities, the BSP announced implicit support for banks, which will take a hit from income losses on interests, surcharges, and lending-related fees. 

 

… 

So while bank NPLs are about to improve statistically in the 4Q, the policy of forbearance would impose substantial losses on them. And because such losses translate to a significant drain of liquidity, the BSP’s response, thus, is to further inject liquidity to the industry through QE and possibly 200 bps RRR cuts. 

 

Under Economic Reopening: BSP Declares Debt Subsidy to Borrowers as Consumer NPLs, led by Real Estate, Soars! September 20, 2020 

 

 

Figure 3 

While Non-performing loans (NPLs) indeed slowed in December, distressed debts continued to surge. (Figure 3, upmost pane) 

 

The reprieve from the BSP’s operational and regulatory relief, unprecedented injections, mandated loans to targeted sectors and the other variety of measures had barely stanched the rocketing delinquent debt accounts. Unless extended, some of the bailout measures are about to expire or have already matured.  

 

For a system increasingly dependent on unproductive debt, would this dynamic not be a natural consequence? 

 

Yet, the toxic combination of supply disruption and the BSP’s liquidity management resulting in the current price pressures exemplifies the effects of the fusion of the indirect impact of the medical gulag, and subsequently, the bailout policies contrived to mitigate the side-effects. 

  

The question is how will the economy, the bank’s balance sheets, and income statement perform in the face of accelerating street inflation? 

 

Here’s a clue. First a backstory.  

 

The CPI bottomed in 2019 as the BSP accelerated liquidity injections on the same year by cutting the Reserve Requirements Ratio (RRR) by a stunning 400 bps from 18% to 14%, slashed policy rates from 4.75% to 4%, as well as monetized government debt (net claims on central government) to the tune of Php 453 billion or a 23.7% YoY increase to Php 2.364 trillion accounting for 12.11% of the nominal GDP (NGDP).  

 

That’s 2019. 

 

In 2020, the BSP’s monetization of National Government debt surged by 31.22% or Php 751 billion to Php 3.115 trillion, accounting for 17.33% of the NGDP, while policy and RRR rates were chopped by 200 bps to 2% and also by 200 bps to 12%, respectively. 

 

Again there was no recession in 2019, but the BSP acted as if there was one. Annual GDP was 6% then.  

 

Why?  

 

Because the trends of bank lending growth (down) and delinquent loans (up) were headed in opposite directions. So the BSP tried to resuscitate the banking system even before the pandemic landed on the country. The pandemic only provided them the camouflage to implement more aggressive measures or “never let a serious crisis go to waste…it is an opportunity to do things you think you could not do before”. 

 

And what might have accelerated the banking system’s pre-pandemic woes?  

  

Net NPLs bottomed in October 2016, a year after the CPI came at the brink of deflation, where the BSP responded by reactivating its liquidity injection programs starting with its monetization of public debt. (Figure 3 middle pane) 

 

And money supply growth, reflecting increases in bank loans, as well as the BSP’s QE, accelerated alongside the CPI. But instead of raising rates to stem the quickening pace of the CPI, the BSP held back. The wild run of the CPI culminated with a rice crisis in 2018.  

 

The panicked BSP increased its policy rates by 175 bps from 3% in April to 4.75% in November 2018 or just five months. Amazing. By the March of 2019, Net NPLs belatedly jumped to a new high! And this explains the bailout policies of 2019. 

 

The spiking CPI represented the unintended consequence of the boom policies implemented by the BSP, eventually resulted in the rise of credit delinquencies.  The pandemic only reinforced this. 

 

 

Figure 4 

In the meantime, the jump in the CPI from September 2019 to January 2020 may not be a coincidence with the sharp updraft in the banking system’s cash reserves as a result of the infusions by the BSP. Through leakage in the real economy, liquidity must have helped spurred the CPIs ascent.   (Figure 3 lowest pane) 

 

The January 2021 upsurge in CPI has likewise coincided with the revving up of cash reserves of the banking system. 

 

The colossal amounts of liquidity the banks are sitting on have likewise been affirmed by the money supply conditions. 

 

The growth of the banking system’s cash reserves vaulted 27.73% in 2020, the highest rate since 2013, to Php 3.6 trillion accounting for 18.42% share of the Php 19.449 trillion assets of the Philippine banking system.  At the end of 2020, the growth of Philippine bank assets tumbled to 6.06%, close to the September 2020 low of 5.91%, representing 2012 levels. 

 

Further, the share of M3 to headline GDP rocketed to 79.04% last year from 66.05% in 2019. Stunning. (Figure 4, upmost pane) 

  

The booming share of cash in circulation to GDP from 7.21% in 2019 to 9.89% last year supported the spike in M3. In reality, cash doesn’t circulate. At any given moment, cash is always held by someone or by an entity. 

  

That said, the profusion of liquidity will eventually end up somewhere in the economy.  Though some may argue that the government may be sopping up part of this through increased issuance of debt, much of this argument underappreciates the consequences of monetary inflation.  

 

The percolation of central bank liquidity injections occurs as a time-consuming process and is distributed unevenly in the economy. Central bank draining operations are not impeccable. The asymmetric entry points of liquidity to specific groups supported by time gaps with central bank operations represent leakages. 

 

And this is the reason that even a minor improvement in demand in the face of massive supply dislocations represents an inflation time bomb. 

 

And yes, the rampaging speculative mania at the PSE can be seen as an example of such liquidity spillovers. Except that instead of goods and services inflation, excess liquidity has been inordinately boosting asset inflation. (Figure 4, middle window) 

 

IV. Higher CPI Exposes the Fragility of the Banking System 

 

Circling back to the CPI, a rising CPI has exposed the earnings vulnerability of the banking system. (Figure 4, lowest pane) 

 

Bank profits ballooned from 2009 to 2013 on a sliding annual trend of the CPI.  

 

However, propelled mainly by the 10 straight months of 30% money supply growth, profits plunged when the CPI surged from 2013 to 2014 

 

Back then, garlic was the center of the rising CPI. 

 

The ensuing rise of the CPI from 2015 to 2018 likewise sent the growth of bank profits tumbling.  

 

And although interest income continued to ascent, the escalation in CPI has coincided with rising bank expenses. (Figure 5, middle window) 

 

The BSP’s bailout operations of 2019 on the back of falling CPI powered a great bond boom that goosed up bank earnings for that year. 

 

Since peaking in 2009, it has been a long-term downhill path for bank earnings. In 2020, reinforcing this trend, bank earnings growth fell by 25.79% on a sharp 32.82% dive in 4Q profits. Various bailout measures have cushioned banks from posting deficits. 

 

Figure 5 

Also in 2020, banks were forced to allot Php 506 billion for provisions on credit losses and bad debt write-offs. (Figure 5, upmost pane) 

 

Like the NPLs, since 2016, provisions for credit losses were increased by banks, although at an incremental annual pace.  But in 2019, banks stepped up their provisioning by 42% YoY or Php 113.26 billion from 2018’s Php 79.73 billion. 

 

Again, provisions for bad loans point to problems in the banking system ahead of the pandemic year.  

 

V. Stagflation’s Dramatic Impact on the Economy Through Banks 

 

Ascendant bond yields in 2016, resonating with the CPI, peaked in October 2018. Higher yields diminished demand for loans, as well as increased accounts of credit impairments. Thus, the banking system’s loan portfolio growth climaxed ahead in May 2018.  

 

In its aftermath, both the bank’s credit portfolio and yields fumbled. Still, the BSP pushed for lower rates, publicly stating that this was to help incentivize demand. It isn’t true that low rates are a sign of credit easing. Milton Friedman called this the Interest Rate fallacy. Keynesians would call this a liquidity trap. In a recent January 5 speech, the BSP chief admitted to this error.  

 

The COVID-19 crisis has also taught us that there are limits to what monetary policy can do. When interest rates are low and private demand are persistently weak, the transmission from financing conditions to private spending might be reduced. Thus, it is crucial that monetary policy ensures favorable financing conditions for the whole economy. 

  

Benjamin E Diokno: The BSP's role in economic recovery and lessons in monetary policy January 5, 2021 BIS.org 

 

From our standpoint, a fatal flaw of conventional monetary policy is to ignore the conditions of the balance sheet.  

 

But importantly, lower rates imposed by central banks are not intended banks to fuel demand but rather designed to decrease the cost of debt servicing. But the latter is not to be admitted publicly.  

 

The banking system’s Total Loan Portfolio exclusive of repos and interbank loans reported two consecutive months of contraction in December. Yes, the central bank’s biggest fear: credit deflation. (Figure 5, lowest pane) 

 

Interestingly, such credit deflation comes in the face of the record credit expansion by the elite 30 member firms of the PhiSYx (as of the 3Q).  

 

But instead of falling, yields of 10-year treasuries appear to be creeping up. 

 

Reflecting the rise of the CPI, if bond yields climb higher, would this not exacerbate the conditions of the bank's core operations, already hampered by tight conditions manifested by the recent credit deflation?  

 

If the BSP’s 4.75% policy rate skewered the banking system’s credit growth in 2018, how much of rate increases can the system absorb before losing ground? 

 

Would such encumbrance not magnify credit losses that worsen the current trend? 

 

Will banks resort to holding Held to Maturity (HTM) assets to conceal investment losses as they did from 2013 to 2018? And if tightening money spreads, the cost of borrowing from the public will also surge. Where will banks obtain savings to fund their operations and to stuff the financial blackhole on their balance sheet?  

 

How would a credit-dependent economy grow with vastly reduced access to cheap credit? 

 

As previously stated, stagflation would have a dramatic impact on the economy.