The market expect the country’s economic growth will continue to be soft or curtailed in the second half of 2023 amid tightened monetary policy to fight inflation, which has more upside pressures due to bad weather, El Niño, transport fare and wage increases.
“We think growth will remain subdued in 2H 2023 as tight monetary policy cools the economy and households begin to rebuild their savings,” said HSBC economist Aris Dacanay on Thursday, Aug. 10, commenting on the lower gross domestic product (GDP) growth of 4.3 percent in the second quarter compared to 6.4 percent in the first quarter this year.
Dacanay, in a consensus with other analysts, said that despite a lacklustre growth, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) is expected to maintain its current 6.25 percent policy rate for some time.
He said the BSP does not have the leeway to diverge from the US Federal Reserve which recently raised its own rates to 5.25 percent to 5.5 percent.
As such, Dacanay thinks the Monetary Board will keep its key rate steady next Thursday, Aug. 17, when they meet to decide its policy action.
“We still think the BSP will only cut rates after the Fed cuts its own, because amongst ASEAN, the Philippine economy has the least monetary policy freedom to diverge from the Fed,” he said.
The BSP's key rate or its overnight reverse repurchase (RRP) rate has been fixed at 6.25 percent for the past two policy meetings in a row due to slowing inflation. For nine straight meetings in 2022 until early this year, the BSP has raised the RRP rate by a cumulative 425 basis points (bps) to curb high inflation and to minimize the exchange rate volatility.
Dacanay noted that since they expect the US Fed will cut its own rates in the second quarter 2024, they also see the BSP following this move but a quarter later or in the third quarter next year.
“But if growth falters even further than expected and core inflation cools even faster, then rate cuts may enter the BSP's radar,” he added.
As for the GDP, Dacanay said the 4.3 percent GDP growth for the second quarter is “way below expectations” and the culprit is the lower government consumption.
HSBC predicted the economy will grow by 5.9 percent in the second quarter.
“Although a substantial slowdown in growth was largely expected this year, many, including HSBC, pencilled the slowdown to happen in the 2nd half of the year. (But) that slowdown came in earlier than expected,” said Dacanay.
One main downside risk to growth for 2023 comes from the BSP’s tight monetary policy and its cooling effect on private consumption. Households are spending less and saving up more post-pandemic.
The slowing global demand is another factor and will “likely remain subdued, more so due to mainland China growing less than expected,” he said.
Inflationary pressures have eased in the past months, with consumer price index falling from a peak of 8.7 percent in January this year to 4.7 percent by July.
However the market is awaiting how the BSP will respond after the US Fed hiked its own rates at the end of July by 25 bps.
Generally, the market prefers an interest rate differential of 100 bps to 125 bps between US rates and BSP rates to prevent a volatile exchange rate. This volatility comes from a narrower interest rate differential.
Similar to HSBC, analysts from Bank of the Philippine Islands (BPI) and First Metro Investment Corp. also expect the BSP will not move rates for quite a while as the inflation decelerates ever closer to the government target range of two percent to four percent.
At the moment, the BSP said the balance of risks to the inflation outlook continues to lean towards the upside due to the potential impact of additional transport fare increases, higher-than-expected minimum wage adjustments in other regions, persistent supply constraints of key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.