EDITORS DESK
2023 was a year of turbulence. It was marked by record interest rates as central banks, including the Bangko Sentral ng Pilipinas (BSP), had to keep pace with the US Federal Reserves. The BSP lifted its policy rate to 6.5 percent, its highest in nearly 17 years.
The high interest rate was a reaction to the soaring inflation, following spikes in oil prices, continuing global supply chain disruptions, the war waged by Russia’s Putin in Ukraine, plus the eruption of the Israel-Hamas war in October last year.
But there was optimism for 2024. Analysts projected interest rates to start going down in the first quarter this year to pave the way for business expansion. There was none though. Then second quarter came, but it’s very clear that monetary authorities are not about to touch their policy rates. The Fed has been giving mixed signals, even hinting that easing of key rates could be postponed later this year or by early 2025 yet.
Our very own BSP, which would just mirror the Fed’s in their policy decisions, is now mouthing fourth quarter, if not an early 2025 reduction.
This is understandable because inflation levels among countries remain stubborn and GDP growth reports in the first quarter are not as significant.
My simple understanding why central banks raise interest rate is because this is a key policy tool to control inflation, which is the increase in the prices of goods and services that households buy over a specific period of time using as basis the consumer price index.
When the central bank raises the interest rate, banks will also pass this onto the loans of their clients. This means higher borrowing cost that discourages businesses and consumers from taking out loans or making major purchases or investing. A high interest rate penalizes your expenses, forces you to slowdown on your investments otherwise be slapped with a painful interest rate that you can hardly cope with.
Such a tacit prohibition will then result in slowdown in spending and consequently lower demand as everyone tries to tighten their belts. As demand slows down, there is little production, and hopefully taking the stubborn inflation by its horn.
Well, the high interest rate might be helping in cooling down the inflation, which has eased a bit. However, inflation rates have not really gone down as what we had hoped for.
The US is experiencing a sticky inflation with monthly inflation rising moderately in March. The stubbornly higher costs for housing and utilities suggested the Federal Reserves could keep interest rates elevated for a while.
Prices outside the volatile food and energy categories rose 0.4 percent from February to March. Measured from a year earlier, these core prices were up 3.8 percent, unchanged from the year-over-year rise in February. The Fed closely tracks core prices because they tend to provide a good read of where inflation is headed.
The March figures, the third straight month of inflation readings well above the Fed’s two percent target, threaten to torpedo the prospect of multiple interest rate cuts this year.
Similarly, the Philippines’ headline inflation or overall inflation increased to 3.7 percent in March 2024 from 3.4 percent in February 2024. This brought the national average inflation from January to March 2024 at 3.3 percent, although still within the BSP’s target of 2.0–4.0 percent. Other countries are similarly situated.
BSP Governor Eli Remolona has made it clear that they have to be comfortable with the inflation level before the Monetary Board, the policy making body of the central bank, can start considering a rate cut.
With the prevailing high interest rate, growth can be limited.
Already, Economic Planning Secretary Arsenio Balisacan said the Philippines now expects the economy to grow lower to between 6.0 percent and 7.0 percent in 2024, from a 6.5-7.5 percent projection last December, with the target range for next year narrowed to 6.5-7.5 percent from 6.5-8 percent. The 6.5-8 percent growth projections for 2026 to 2028 were kept unchanged.
The private sector, which drives economic growth, is also cautiously optimistic.
Already, the UN Trade and Development (UNCTAD) in the latest report warns that further growth deceleration could be expected this year.
The report forecasts global economic growth of 2.6 percent in 2024, barely above the 2.5 percent threshold commonly associated with a recessionary phase.
This rate also signifies the third consecutive year of growth below the pre-pandemic average of 3.2 percent from 2015 to 2019, according to the report.
UNCTAD underscores the need for concerted multilateral action, along with a balanced policy mix of fiscal, monetary, demand-side and investment boosting measures to achieve financial sustainability, create jobs, and improve income distribution.
Well, there are always boom and bust cycles and periods of economic stagnation and stalling. But emerging from the devastating Covid-19 pandemic and two ongoing wars, what can we expect.
Despite the situation we are in, there is definitely growth this year. In fact, the Fed is still confident about that. Analysts even believe that the Philippine GDP forecast could even be among the highest in Southeast Asia.
One thing is getting clearer, this year may not a fabulous one, but 2025 could be it.
(Bernie Cahiles-Magkilat is the business editor of Manila Bulletin)