in the us and has begun to affect the us real economy. its impact has also now crossed to the financial centers in europe, as well as the european real economy. now we are seeing it impact the emerging markets. so far, the effect on emerging markets has mostly been on the financial sector, and generally indirect through risk aversion. indeed, the financial market turmoil has changed into a wider - spread contagion. nonetheless, the three - pronged approach of the us and european governments aimed at : ( 1 ) repairing damaged financial systems through capital infusion ; ( 2 ) providing a liquidity lifeline ; and ( 3 ) enhancing deposit insurance, appears to have some effect in terms of shoring up confidence. this has been evident in the recent improvements in the libor - ois and ted spreads. the libor - ois and ted spreads are viewed as an indirect measure of funds availability in the market. a decrease in spreads typically signals an increased willingness to lend. a similar slowdown in the widening of cds spreads in asia has recently occurred as certain regional central banks also lowered policy rates and injected liquidity to their markets through repurchase facilities. these are “ tractions ” that we are seeing in the markets. i believe these will eventually constrain markets from doing a “ free - fall ”. pockets of the financial markets are slowly adjusting, perhaps in confident response to the recent display of concerted, collaborative and cooperative action from officials of both the major and emerging economies. if these tractions continue and broaden in scope, we may begin to see a further unfreezing of credit and a muting of the negative feedback from the financial turmoil to the real economy. having said that, however, much depends on whether the slowdown in the us and other major economies would be shorter or shallower than first expected.. ii. impact on the philippines how do all of these developments impact on the philippine economy? the philippine financial markets have not been spared from the ripple effect of the worsening global financial strains. as i noted in my introduction, the peso has weakened, credit spreads have widened and the stock market has fallen, like in the other countries. what concerns us now is that a negative feedback loop from the financial markets to the real economy cannot be fully discounted. in the philippines, the macroeconomic impact of the current turmoil will depend, in part, on the linkages between the philippine economy and that of the us. these link

set in motion the process towards the formal adoption of a flexible inflation targeting ( fit ) framework for monetary policy in june 2016. 14. what followed was a period of low and stable inflation till the covid shock. the average cpi inflation between september 2016 and february 2020 was 3. 9 per cent and was closely aligned with the inflation target of 4 per cent. recent phase 15. the onset of the pandemic in early 2020 saw global commodity prices crash as restrictions and stringent lockdowns were expected to lead to a collapse of aggregate demand. there were, however, two occasions during the calendar years 2020 and 2021 when inflation hovered above 6. 0 per cent. first, from june till november 2020 when the surge in inflation was trigged by a series of adverse transitory supply side shocks ranging from increase in retail margins in food items ; supply chain and logistics bottlenecks ; unseasonal rains and resultant crop damage ; and the domestic spillovers from the sharp rise in international prices of edible oils. in the following period, that is from december 2020 to april 2021, inflation moved closer to the target rate of 4 per cent as much of the transitory price shocks waned. the easing of inflationary pressures, however, was short - lived as india experienced a devastating second wave of covid - 19 during april - june 2021 which triggered localised lockdowns, renewed supply chain disruptions and rising retail margins. this pushed inflation above 6. 0 per cent during may - june 2021. the inflation pressures were reinforced by adverse spillovers from rising global commodity prices. 16. the inflationary pressures occurred even as there was unprecedented damage inflicted by the pandemic on economic activity – real gdp contracted by a humungous 23. 8 per cent in the first quarter of 2020 - 21 and by as much as 6. 6 per cent in the full financial year 2020 - 21. against this backdrop, the monetary policy committee ( mpc ) of the rbi maintained status quo on rates during the pandemic despite inflation intermittently breaching the upper tolerance band. the mpc decided to look through the higher inflation print to allow the nascent recovery to get entrenched – both by retaining the accommodative stance of policy and by refraining from hiking the policy rate. since the inflationary episode lacked any significant demand - pull component, any policy tightening at that juncture would have been detrimental to growth and extracted heavy social costs without being effective in containing inflation pressures.