Most economists and business leaders expected the Bangko Sentral ng Pilipinas (BSP) to remain hawkish for longer and they agree with BSP Governor Eli M. Remolona Jr. that there is room to adjust benchmark rate higher while inflation is above four percent.
“BSP has to act, and act fast lest inflation expectations are de-anchored,” according to GlobalSource partner and country analyst, Diwa C. Guinigundo in a commentary Thursday, Oct. 26, after the Monetary Board raised the policy rate off-cycle by 25 basis points (bps) to 6.50 percent.
Remolona has already prepared the market last Tuesday that the BSP will hike the target overnight reverse repurchase (RRP) rate when they have their regular Monetary Board meeting this week.
Guinigundo, who is a former BSP deputy governor, said the BSP needs to do a preemptive off-cycle policy rate adjustment now. He called the initial 25 bps rate hike a “baby step”.
“There could neither be any clearer forward guidance nor more appropriate monetary stance. It should help calm the market. The BSP anticipates upside risks but it has enough time to catch up with the last two meetings for the year,” he added.
Meanwhile, businesses and especially exporters have braced themselves for further rate increases and accepted it as necessary to combat persistent high inflation. As of end-September, inflation rate is at 6.6 percent average, way above the target range of two percent to four percent.
George T. Barcelon, president of the Philippine Chamber of Commerce and Industry, said high interest rate "brings more burdern to the smaller establishments in financial costs."
Philippine Exporters Confederation Inc. Chairman Sergio Ortiz-Luis, Jr. said they already expected the off-cycle rate hike to fight inflation.
“The rate hike is expected to level with other economies so we will not be left behind. I think the rate hike has been delayed for a while, so it has to be done now. We have to live with the fact that is tied with the realities to stay competitive and balance growth,” Ortiz-Luis said.
“In order to contain inflation, we have to do it,” he added.
He also noted that while a higher interest rate environment is worrisome to some sectors, it is not expected to have a “major” impact on exports. Major factors include challenges overseas, geopolitical, disruption of supply chain and markets, he said.
"It will have more of an effect on borrowers. This means more difficulty for borrowers especially the small ones, but we cannot fault the government because of high inflation and huge budget to fulfill,” said Francis Chua, founder of the International Chamber of Commerce in the Philippines.
He, however, said that one thing going for the country is that the economy is still bullish.
Remolona himself said Thursday that – depending on the data – they might still increase the 6.5 percent RRP rate higher. He did say earlier this month that he is not ruling out a 25 bps rate increase on Nov. 16 which is the scheduled monetary policy rate meeting.
The last Monetary Board policy meeting will be on Dec. 14.
The BSP will be waiting for the October inflation result to come out in the first week of November, and the third quarter gross domestic product (GDP) report which will be announced on Nov. 8.
Meanwhile, Guinigundo is “bothered” by Socioeconomic Planning Secretary Arsenio M. Balisacan’s view that the source of inflation is supply side and not demand side – and while it is true that supply-side pressures are driving up inflation – his words imply that there was no need for the BSP’s “monetary policy cure” since the issue is not on the demand side.
Guinigundo quoted Balisacan's words, that he "thinks the source of inflation is the supply side and not demand side that requires a monetary policy cure.”
“The logical conclusion of this statement is that for him, raising interest rates further ‘can hurt’ the economy and consumers,” he noted.
But he also said that the suggestion that BSP “avoid responding to higher inflation would effectively allow inflation to be more entrenched.”
“Such a view ignores enormous upside risks to the inflation forecasts of 5.8% in 2023, 3.5% in 2024 and 3.4% in 2025. If transport fares escalate, food prices further climb up and minimum wages are more generalized and bigger than expected, it is highly probable that even 2024 and 2025 targets could be at risk. This is not to mention the possible disruption caused by the continuing invasion of Ukraine, the raging conflict in the Gaza Strip, prolonged El Niño phenomenon and further increases in fuel prices,” Guinigundo said.
He further noted that “there is a risk that market’s inflation expectations could be de-anchored.”
“The country’s planning authority can do better than argue for benign neglect of inflation. The costs could be higher many times over,” said the former BSP official.
Guinigundo added that the concern for the real sector or the real economy “may be misplaced”.
Even Remolona himself said the cumulative 425 bps rate increases before this week has not derailed GDP growth. He pointed to waning pent-up demand as to why the economy has slowed down in the second quarter versus the first quarter. After Thursday, the BSP has raised the benchmark rate by 450 bps.
The BSP chief expects the third quarter GDP will only be “around 4.5 percent” and little changed from 4.3 percent in the second quarter.
“The concern for the real economy may be misplaced, and this is not the first time this is happening. Last year, as early as March 2023, inflation had already breached the 2-4% target. Since then until September 2023, average monthly inflation had never fallen below the upper end of the official target, reaching a high of 8.7% in January 2023. Yet, the BSP only took baby steps of 25 basis points (bps) each in May and June, before deciding to go on an off-cycle meeting with a 75 bps hike,” said Guinigundo.
“Even from an output perspective, the concern of the planning authority has little basis,” he added.
“The Philippine economy continues to grow even if a slowdown has become more apparent. With an average of 5.3% for the first two quarters of 2023, economic growth in the Philippines is hardly anemic. Even Philippine authorities take pride in the forecast of several think tanks and international financial institutions that the country will be one of the fastest growing economies in Southeast Asia,” said Guinigundo.