amando m tetangco, jr : sustaining growth while riding the uncertainty speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( the central bank of the philippines ), at the bloomberg ’ s foreign exchange forum, makati, 13 august 2014. * * * introduction – caution in a time of uncertainty good afternoon. seeing all of you here once again validates my theory that indeed there is a strong correlation between volatility and attendance in a forum like this one – to listen to the central bank talk about uncertainty. from a smaller function room downstairs where we used to hold this forum, we have been kicked upstairs to this ballroom. holding this discussion now also shows bloomberg ’ s knack for getting the timing right. your interest confirms that the most common reaction to uncertainty is caution. think about it, if you are about to undergo your annual physical, don ’ t you modify your eating habits and hold off on that last piece of “ lechon ”? however, how long you feel you need to deprive yourself depends on your “ initial conditions ”. if you are in fairly good health, maybe you would only skip one craving for that savory bite and you would still be confident to walk into the doctor ’ s office. the same reality applies to the financial market. 1 ) when market participants sense uncertainty, they proceed with caution and 2 ) the impact of uncertainty on your behavior will depend on initial conditions. if uncertainty finds you at a time of high market volatility, you are likely to be more nimble, than when uncertainty finds you at a time of low volatility. right now we are in a low volatility environment. some analysts say volatility is “ eerily ” low. there is even an assessment that markets have become “ too ” complacent. is that the case among market participants in the philippines? i hope not. see, the thing with “ uncertainty ” is that the degree of uncertainty is itself uncertain. therefore, we really cannot, and should not be complacent. because however quiet markets seem to be now, risks remain. risks remain what are these risks that we face today? let me name four that are top of mind : 1 ) monetary policy normalization in advanced economies. the consensus, as i understand it, is that the fed would continue with its current pace of tapering. the operative question now therefore is when will

exceptionally accommodative after coping with the lengthy period of deflationary pressures and the pandemic shock. let me now turn to inflation, the key variable of our monetary policy. a series of supply - side disruptions and a rapid recovery in global demand have pushed inflation significantly above our medium - term target of 2 %, after almost a decade of too - low inflation. this might not necessarily be an undesirable development, if the reasons behind the pick - up in inflation were about to fade soon, bringing inflation swiftly to its target. however, inflation expectations have adjusted and shifted upwards, with financial market and consumer survey indicators pointing to inflation between 2 % and 3 % in the medium and longer - term. 2 moreover, expected inflation is becoming an important element in price setting in euro area firms, as shown by the ecb survey. 3 high inflation – coupled with labour market tightness - has also triggered calls for higher wage rises. the ecb's experimental wage tracker so far points to a moderate increase in wage growth in this year and the next, below the projected inflation in the euro area. however, the longer the high 2 / 5 bis - central bankers'speeches inflation rates persist, the likelier it is that they will be transmitted to higher wage growth and potentially lead to a wage - price spiral. in the medium term, therefore it seems possible that inflation will settle at higher levels than we have observed in the recent years, even after the existing supply shocks fade. we could face a switch to a higher inflation regime, as some of the drivers of past deflationary pressures have lost steam, such as global trade liberalisation and the integration of low - wage chinese workers to the global economy. at the same time, some structural inflationary factors are gaining momentum, namely the green transition, strengthening of the eu's strategic autonomy and the reorganisation of global supply chains with possible nearshoring. there will still be some deflationary forces at play, such as rapid digital transformation, other innovation and elevated debt levels, but there is a question as to whether these could overcome the inflationary forces. let me now turn to monetary policy. given the high inflation in the euro area, reaching 8. 1 % annually in may and ranging from 5. 4 % in malta to 20. 1 % in estonia, together with strengthening inflation expectations, we need to make further steps towards normalisation of our monetary policy. after we ended net asset purchases under the