Bangko Sentral ng Pilipinas (BSP) officials project a strong fourth quarter growth that is about the same as the third quarter outturn of 5.9 percent on the back of higher government spending and easing inflation during the period.
BSP Governor Eli M. Remolona Jr. reiterated that BSP’s tightening bias or hawkish stance has not derailed the growth momentum, that the 450 basis points (bps) cumulative increase to the policy rate, currently at 6.5 percent, has not affected the country’s economic expansion.
In fact for the first six months of 2024, he expects “stronger than now (GDP)” performance.
“In the face of high inflation, when we have to tighten monetary policy, we try to do it in a way that we don’t tighten unnecessarily. We don’t want to tighten unnecessarily that it affects growth,” said Remolona.
Also, BSP Senior Director of the Department of Economic Research Dennis D. Lapid said that based on their nowcast models, the numbers for the fourth quarter growth are “showing strong outturn”.
“For Q4 (fourth quarter) we’re getting something similar to the third quarter (of 5.9 percent),” said Lapid.
The accelerated government spending and rebound in manufacturing activities should boost growth in the fourth quarter. At the same time, the easing inflation should also drive domestic demand.
Meanwhile, Remolona said that while the higher policy rate has not impacted on growth, the data and the models they use are not perfect numbers.
“To be honest, the models and the data are imprecise so it’s possible to make mistakes even though (it’s just) small ones. And even if we make mistakes, if we err on the side of tightening too much that it affects our growth … the (impact on) outlook tends to be temporary. That’s how we look at things,” he said.
The inflation-targeting BSP has a three-year medium term inflation target of two percent to four percent. As of end-November, inflation has averaged at 6.2 percent, way above the target. To curb high inflation, the BSP has adjusted the key rate from a flat two percent in May 2022 to 6.5 percent by Oct. 26 in what was an off-cycle rate hike.
Appropriate targets, monetary policy
Remolona has often said that the two percent to four percent inflation target is “just right” for an economy such as the Philippines and that as an inflation-targeting central bank, they have the tools or monetary policy arsenals to balance growth and inflation.
He added that “we set the target of between two percent to four percent because we think this inflation rate is the kind of inflation rate that gives room” for the economy to grow.
The BSP chief also reiterated that the economy can absorb the 6.5 percent target reverse repurchase (RRP) rate.
He emphasized once more that the real rate or the neutral rate of just 2.4 percent means the benchmark rate still has some leeway to increase without affecting growth.
“We’re at 6.5 (percent). Our inflation rate for November is 4.1 so that leaves real rate at 2.4 percent. That’s still low for a country like ours,” said Remolona. Computing the real rate is arrived at by subtracting the current inflation rate to the target RRP rate of 6.5 percent.
The country’s GDP grew by 5.9 percent in the third quarter this year, higher than 4.3 percent in the second quarter, but lower than 6.4 percent in the first quarter.
The 5.9 percent third quarter growth is the strongest growth posted among economies in Asia during the period.
Year-to-date, the economy has expanded by 5.5 percent, still below the government’s six percent to seven percent growth assumption for this year.
To achieve the lower end of the growth assumption, the GDP has to grow by at least 7.2 percent in the fourth quarter.
Based on the BSP’s November 2023 Monetary Policy Report (MPR), it said the country’s growth prospects remain intact for 2023 to 2025 despite global headwinds and tighter financial conditions.
However, it also noted that GDP growth could settle below government targets for 2023 and for 2024 and 2025. The Development Budget and Coordinating Committee recently revised lower its 2024 growth target to 6.5 percent to 7.5 percent from the previous 6.5 percent to eight percent. For 2025 until the end of the Marcos administration, the growth target remains at 6.5 percent to eight percent.
“The estimated growth path reflects primarily the impact of subdued global economic conditions as well as the lagged impact of the policy rate adjustments. Nevertheless, the full-year growth forecasts for 2023 to 2025 have been adjusted upwards (and) reflecting largely the faster-than-expected growth outturn in Q3 2023, supported by consumer and government spending and by higher growth nowcast for Q4 2023,” according to the BSP.
It added the growth prospects could still be offset partly by the impact of higher real policy rate as well as the estimated impact on agriculture of El Niño weather conditions.
“The economy is projected to operate slightly above potential output in 2023. The BSP’s forecasts indicate the output gap will fall slightly in negative territory in 2024-2025 from a small positive figure in 2023,” noted the BSP.
It further noted that the projected gradual decline in the output gap “reflects the impact of BSP policy interest rate adjustments on consumption and investment, decline in real income given high inflation and fiscal consolidation, and the projected slowdown in global growth affecting external trade.”
“Meanwhile, improving labor conditions, productivity recovery, and rising investments could support a higher potential output growth path,” it added.
On Dec. 14, which was the last monetary policy meeting of the Monetary Board, the BSP kept the policy rate steady. A steady policy rate will allow previous policy interest rate adjustments, including the interest rate increase in October, to continue to work their way through the economy, said the BSP.
“Credit growth has continued to slow down. The pass-through to short-term market rates have been fully transmitted although interest rates of various consumer loans have yet to reflect the complete pass through from policy rate increases,” added the BSP.