Tight balancing act
I like the forthrightness of Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona at last Thursday’s press conference on the Monetary Board’s keeping its key overnight interest rate policy.
This amidst the upside risks on inflation. However, assessing the effects of their aggressive monetary tightening over a year's horizon, the observation was a “waning pent-up demand.”
And, the construction sector is the best barometer of this. While construction noise seems to reverberate in the heart of the Central Business District of Makati and elsewhere in the Metropolis, it seems to be diminishing in the countryside.
Kyla’s family is into the construction business. Not that they are deeply involved in construction per se but they own and operate Sandigan Lumber Corp. that sells construction materials. It’s experiencing a slide in the volume of sales, exactly mirroring BSP’s assessment.
Indeed, the demand is diminishing. The peak season for construction is in the months of March-April-and-May. Pre-pandemic, the average volume of sales increased by 15 percent. Surprisingly, during the two-year pandemic era, sales even jumped to as much as 20 percent.
For this year, Kyla observed a reversal of trend. The volume of sales dropped between 10 and 15 percent. One of their suppliers put it more graphically: the number of trucks hauling construction materials dropped significantly.
During peak months pre-pandemic, the problem was how to service the construction requirements of these delivery trucks. The line was long and winding. Now, the supply is overwhelming and sadly, there was little demand.
Blame this development on high interest rate. Gov. Eli was honest in admitting that the “impact of prior monetary policy tightening “continues to weigh on credit” as the decision to keep interest rate at bay resulted in higher cost of doing business, specifically if one has to source out a portion of its capital expenditures from financial institutions.
The authorities were hoping to stave off the continuing drop in business and banking activities. The latest business outlook showed “less upbeat” for the next 12 months although consumer confidence usually improves in the last quarter, a natural occurrence heading towards the Holiday season.
Indeed, it’s a difficult balancing act: prevent the economy from choking and at the same time prevent inflation from showing its ugly head. As the monetary authorities see it, the “balance of risks on inflation outlook remains skewed toward the upside” and notwithstanding the “potential impact in the further adjustments in transport fares,” as well as the expected higher cost of electricity.
It’s an overture for a looming increase. The Monetary Board still has two more policy meetings, one towards the end of October and the last one sometime the second week of December.
An off-cycle rate hike, though, is in the horizon. Simply because it’s no brainer to assume inflation would steadily inch-up due to the ripple effects of the sustained increase in the domestic pump price of petroleum products.
Premium gasoline users, like me, have to dip into their pockets an additional ₱17.50 for a liter of gasoline, which now costs ₱75.40. Some would argue that the prevailing price, notwithstanding the measly 20 centavos dip last Monday, is still off by ₱4.45 with the price per liter of gasoline at ₱79.85 in June last year.
My gut feel, which basically reflects the assumption of one of my favorite market analysts, is that the BSP overnight interest rate will end this year at an even 7.0 percent.
Considering the continuing challenges of supply bottleneck and the depreciating peso, flirting near ₱60 to a green, reminiscing of the market conditions last year, the BSP is, indeed, in a tight balancing act.
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