Inflation, interest rates, and foreign exchange: Media must get their economics right

Local and international media outlets are filled with news that the global economy is suffering. Prices of basic commodities like food and fuel are continuously rising, borrowing money has also been more difficult, and imported products are becoming more expensive. If policies of governments and central banks are executed improperly, an economic recession might spread and cause further uncertainty. Media entities that are highly critical of the administrations of outgoing President Rodrigo Duterte and incoming President Ferdinand Marcos Jr. quickly blame the government of ineptitude. Knowing that Philippine mainstream media values content sensationalism more than sound economics, is all that criticism even justifiable? Let’s discuss and analyze inflation, interest rates, and foreign exchange to ably distinguish political propaganda from genuine economic perspectives.

Simply defined, inflation is when prices of products increase. This is due to the law of supply and demand, where a certain product’s value increases when either its supply decreases, or when its demand increases. Just like any product, currencies also follow this economic law. When the Covid-19 pandemic wreaked havoc, governments and central banks attempted to prop up consumption by issuing government bonds and turning on the money printing machine. Quantitative easing was the name of the game, where helicopter money was basically distributed to everyone, specially in the Global North. However, economists were quick to point out that such aggressive policies would haunt the economy, which we currently experience in the current situation.

As a currency issuing body, the central bank has the levers that can manipulate money supply as its monetary policy. If there’s more money flowing in the economy, it can be construed that the central bank attempts to curb unemployment. However, the opposite is true because as the central bank desires a healthier inflation rate, the aforementioned financial institution decreases money supply. That is why the Bangko Sentral ng Pilipinas (BSP) has recently hiked interest rates to restrict money supply. Nevertheless, the United States’ Federal Reserve (Fed) has been more aggressive in addressing inflation, as it sees numbers similar to that of the early 1980’s.

Being the world’s most ubiquitous and influential currency, the United States dollar is experiencing inflation rates last seen during the first term of the Reagan administration. This has led Chairman Jerome Powell and the Fed to increase interest rates multiple times this year, albeit not as aggressive when then-Chairman Paul Volcker faced an identical economic dilemma. Similarly with the Fed, other major currency issuing bodies like the Bank of England and the European Central Bank hiked interest rates to tame inflation. Needless to say, pushing interest rates up has other repercussions that go beyond limiting money supply.

With higher interest rates, it would be more difficult to borrow money. This leads to more expensive mortgages, which will definitely hurt homeowners who are still paying housing loans that they have incurred. On the other hand, individuals and private companies that save money end up earning more. In a larger setting however, hiking interest rates can create undesirable situations in foreign exchange, and the Philippine peso was one of the victims when the Fed attempted to tame the United States dollar’s inflation during the early 1980’s. From mid-1970’s until the end of that decade, a dollar was trading for seven pesos. But by mid-1980’s, the value of the greenback skyrocketed, pulling the peso’s value to 17 for every dollar. This has caused imported products like petroleum and wheat to increase in price and paying sovereign debt became more difficult. Such scenario is currently being experienced by both Sri Lanka and Pakistan, where flawed government policies and political uncertainty also worsened their crises.

When it comes to foreign exchange and as the primary currency for international trade, the United States dollar has strengthened, which caused other floating and free-floating fiat currencies to depreciate in value against it. Aside from the Philippine peso, the South Korean won and the Indian rupee have also devalued. As a way both to indirectly address inflation and to mitigate gaps in global interest rates, the Bank of Korea and the Reserve Bank of India have hiked their respective rates. Beyond these Asian currencies, the Japanese yen has greatly devalued to 135 yen to the US dollar, which is a number last seen during the 1990’s, but the Bank of Japan is still hesitant to engage in quantitative tightening. As a result, this hesitancy has exacerbated Japan’s energy security issues as the Japanese archipelago is highly dependent on imported hydrocarbons

Going back on exchange rates, having a stronger or a weaker peso doesn’t necessarily mean that it would bring tremendous benefits to the Philippine economy, specially that there are various economic players in the market, where both opportunities and threats arise. Assuming that the current exchange rate for a dollar is 50 pesos, we can generate two scenarios when the peso weakens to 60 (Scenario A), or when the peso strengthens to 40 (Scenario B). In Scenario A, imports sold in the Philippines would become more expensive and servicing dollar-denominated debt also becomes more difficult. On the other hand, exported products valued in dollars will generate more profit, which would include foreign remittances. Foreign investments and international tourism would also become more cost-effective as their purchasing power in a devalued currency increases. For Scenario B, it would be the complete opposite. Generally, what investors and businesses prefer is a predictable, stable, and trustworthy currency. After all, a relatively balanced Philippine peso is a very important key in achieving sustainable economic growth.

With these observations and on how the law of supply and demand reigns supreme in economics, it can be concluded that inflation, interest rates, and foreign exchange are all interrelated. Both fiscal and monetary policies can indeed steer and influence how a country approaches its economic interests. However, with a highly globalized and interconnected Philippines, which depends on foreign remittances and imported hydrocarbons, it is nearly impossible to create a country that will be immune to the whims of the global market short of going the way of pariah nation-states like North Korea and their autarkic system. Thus, it’s irresponsible for mainstream media to purely blame the government for uncontrollable external factors. Their one-sided propaganda had gained the ire of their audience as more and more viewers are becoming more distrustful and disoriented with the brand of journalism that they have been embracing.

The Unpopular Opinion

A no one who enjoys the fun things of life in private.
A believer of freedom, capitalism, and conservative brand of politics.
A no one who cares less about popular public opinion.
A believer that life can be better, if every one is a tad more responsible.