eli m remolona : inflation dynamics as influenced by the peso - dollar exchange rate speech by mr eli m remolona, jr, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the ejap ( economic journalists association of the philippines ) - san miguel corp. economic forum, manila, 8 july 2024. * * * introduction [ secretary ] frederick go, secretary ralph [ recto ], secretary arsi ( arsenio balisacan ), vice - president cecile [ ang ], usec ( undersecretary ) jojit ( joselito basilio ), [ national ] treasurer sharon [ almanza ], members of ejap ( economic journalists association of the philippines ), and fellow public servants, magandang umaga po. the job of the bsp ( bangko sentral ng pilipinas ) is to provide a stable environment for the growth of investments in the economy. and so, today, i just want to make three points about what the bsp is doing in that regard. first, i want to talk about the dynamics of inflation when inflation is driven by supply shocks, to help understand better what the bsp is trying to do. second, i want to talk about the dollar peso exchange rate and why it is moving the way it does. and third, i want to talk about the implications of that for inflation. inflation dynamics so, if you look at the picture, it depicts what happens to our inflation rate when inflation is driven by the supply side. here, we break down the different components of our cpi ( consumer price index ) into the components that contribute to inflation. if you look at the graph in the beginning, in the early part of 2022, it was mainly energy ( yellow part of the bar ) and then it shifted to food. today, it has shifted to the red part of the bar. that is the price of rice. and one thing you will notice is the roles of the different components of the cpi change over time. that is the nature of a supply - driven inflation. if it were demand - driven, it could be more even across the different components of inflation. this is why we think the non - monetary measures that the government has put in place, especially eo ( executive order ) 62 are so helpful, because that will help us get to where we want to go, which is

the country ’ s productive capacity. consumer spending is low, primarily due to households ’ uncertainties about the future, but also due to their slowing income. the two other aggregate demand components also show limited ability in providing stable economic growth impulses : public spending is limited, due to lack of fiscal room because of a higher public debt, while albania ’ s exports suffer the sluggish demand from the international markets and the low degree of diversification. finally, business investments are downward, reflecting businesses ’ restricted room for boosting their sales and banks ’ tighter lending standards. bis central bankers ’ speeches the economy is a complex and interdependent mechanism. all the afore - mentioned factors have led to a sluggish labour market and elevated pressures on public finances. they have also increased vulnerabilities to many businesses and the non - performing loans in the banking system. in bank of albania ’ s opinion, this situation requires pursuit of stimulating macroeconomic policies. economic theory and practice suggest that the maintenance of macroeconomic balances is a prerequisite to pursue these policies. i have reiterated that these balances do exist in the albanian economy. they constitute a strong point for its future outlook. inflationary pressures remain weak, external balances of the economy are improving and the albanian financial system is healthy. but the macroeconomic balances should be maintained and further strengthened in the future. this objective is a preliminary filter and every macroeconomic incentive should pass through it. every macroeconomic stimulus should also consider another vital equilibrium : that of financial stability in the country, otherwise it is at risk of becoming unproductive. the global crisis has significantly elevated a country ’ s exposure to risks related to financial stability. therefore, this equilibrium should remain a constant priority and in concert with stimulating development policies. the healthier we are financially, the broader the spaces available to stimulate the development of the country. having said the above and availing myself of the presence of the three main stakeholders responsible for designing and implementing the macroeconomic policies, let me now share with you bank of albania ’ s opinion about promoting the country ’ s development in the short term. the bank of albania, being an independent institution, responsible for the monetary policy and for the supervision and regulation of the banking system, has taken concrete actions to boost demand in the economy. we have lowered the key interest rate to record lows and are considering other spaces available in this regard. we have also supplied the banking system with the liquidity needed