Rate hikes expected to impact growth more than inflation — analysts

Headline inflation quickened to 6.1% in September from 5.3% in August, marking the 18th straight month that inflation exceeded the central bank’s 2-4% target. — PHILIPPINE STAR/MIGUEL DE GUZMAN

FURTHER MONETARY POLICY tightening by the Bangko Sentral ng Pilipinas (BSP) will likely slow down economic growth more than it will tame inflation, analysts said.   

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said market players are aware that rate hikes at this stage will not address supply-side inflation.

“BSP has at its disposal monetary tools and thus has no ability to fend off price pressures from supply-side factors. In a sense, BSP lacks the precision strike capability on inflation and must do so indirectly by slowing capital formation which would have a knock-on effect on growth,” he said in a note.

In an off-cycle move last week, the Monetary Board raised borrowing costs by 25 basis points (bps) bringing the benchmark interest rate to 6.5% — the highest since May 2007. 

The BSP has raised interest rates by 450 bps since May 2022 to fight stubborn inflation.

Mr. Mapa said the off cycle move reflects the BSP’s concern for the inflation path next year. The BSP sees average inflation to 5.8% for 2023, before easing to 3.5% in 2024 and 3.4% in 2025.

“We can see that economic growth is the collateral damage in this whole exercise where BSP will have little choice but to target growth, in a bid to slow economic activity enough to snuff out whatever is left of demand side pressures,” he said.

The Philippine economy expanded by 4.3% in the second quarter, the slowest growth in two years. For the first half, gross domestic product (GDP) growth averaged 5.3%, still below the government’s 6-7% target band for 2023.

Cid L. Terosa, senior economist at the University of Asia and the Pacific, said more rate hikes will have a bigger impact on economic growth.

“Although current inflationary pressures have come from both demand and supply sides, rate hikes have an immediate effect on demand rather than supply. Hence, rate hikes can slow down economic activity more than it can subdue supply-side inflationary pressures,” he said in an e-mail.   

BSP Governor Eli M. Remolona, Jr. earlier said the aggressive tightening has not affected the Philippines’ growth prospects but noted that pent-up demand is waning.

National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan has repeatedly cautioned against further rate hikes, saying that it will have a long-term impact on the economy. 

Security Bank Corp. Chief Economist Robert Dan J. Roces said the decision to further tighten monetary policy should be made carefully given inflationary pressures and current economic activity.

“If the primary drivers of inflation are supply-side factors like elevated food and oil prices, then rate hikes might not be the most effective tool, as they won’t directly address these issues,” he said in a Viber message.

“Instead, they could further constrict economic growth by reducing consumer spending and business investment. While rate hikes could have some impact on second-round effects and inflation expectations, their potential to slow down economic growth cannot be overlooked,” he said.

Mr. Roces noted that rate hikes are designed to help tame inflation by making borrowing more expensive. However, rate increases can be “detrimental if the economy is already in a precarious state.” 

“Given the context that Mr. Remolona has signaled a more cautious approach to rate hikes indicates that the central bank is waiting for more economic data to guide its next steps, suggesting a wait-and-see approach rather than immediate action if not warranted,” he said.   

Last Friday, Mr. Remolona signaled there is a “good chance” the BSP will not hike on Nov. 16, and will instead keep borrowing costs unchanged as October inflation is expected to ease.

“For now, the tone appears to be one of caution with BSP preaching data dependence and a pause at least at the November meeting,” Mr. Mapa said.

The next policy-setting Monetary Board meeting will come after the release of October inflation data on Nov. 7 and third-quarter GDP data on Nov. 9. — Keisha B. Ta-asan   

Neil Banzuelo

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