Elevated inflation forced central banks around the world to raise interest rates this year to dampen demand, and in the Philippines, economists are linking the sluggish growth in the first half of 2023 to the impact of monetary tightening done by the Bangko Sentral ng Pilipinas.
The BSP raised the benchmark interest rate by a total of 425 basis points to 6.25 percent between May 2022 and March 2023, before taking a prudent pause in the last three Monetary Board meetings amid the easing of inflation.
The policy-making Monetary Board of the BSP, on Aug. 17, 2023, kept the overnight borrowing rate steady at 6.25 percent. It also left the interest rates on the overnight deposit and lending facilities untouched at 5.75 percent and 6.75 percent, respectively.
MB chairman and BSP Governor Eli Remolona confirmed that the decision took into account the lackluster 4.3-percent gross domestic product growth in the second quarter and 5.3 percent in the first-half, below the 2023 target range of 6 percent to 7 percent.
“The Monetary Board also recognized the challenging outlook for economic growth, as the weaker GDP outturn for the second quarter of 2023 reflected a broad-based slowdown in domestic demand. Household consumption slowed due to elevated commodity prices, while government spending contracted relative to the previous year,” Remolona said.
“Given these considerations, the Monetary Board deemed it appropriate to maintain monetary policy settings to allow a moderation of inflation even as authorities continue to assess the emerging risks to the inflation outlook,” he said.
Remolona said the latest baseline projections continued to show a return to inflation target in the fourth quarter of 2023. Average inflation for 2023 is seen at 5.6 percent, while the average inflation forecasts for 2024 and 2025 now stand at 3.3 percent and 3.4 percent, respectively.
Remolona said the BSP is prepared to respond as necessary to safeguard the inflation target, in keeping with its primary mandate to ensure price stability.
Data from the Philippine Statistics Authority showed that from a peak of 8.7 percent in January 2023, inflation eased to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April, 6.1 percent in May, 5.4 percent in June and a 16-month low of 4.7 percent in July.
Oxford Economics said the economy felt the impact of monetary tightening done by the BSP to rein in inflation. It said the second-quarter data added weight to its expectation that the bank was unlikely to hike the policy rate in its next meetings.
Hongkong and Shanghai Banking Corp. said, however, inflationary pressures might put rate hikes back on the table. It cited the rising rice export prices that increased by 20 percent since the middle of July and reached their highest level since 2011.
“We think the BSP is comfortable with where monetary policy is now at 6.25 percent. Yes, the peso depreciated by 2.7 percent against the US dollar in a span of just 10 days, but at 56.3, the USD-PHP is still within the DBCC [Development Budget Coordinating Committee] assumption parameter of 54 to 57,” HSBC said.
HSBC said to some extent, the growth cooling might also support macroeconomic stability and domestic balance. Although marginally improving, it said the national saving rate had not normalized to pre-pandemic levels while investment continues to be robust.
This imbalance might then require a tight monetary stance to help rein in demand, incentivize saving and bring the domestic economy back to balance, it said.
Improved employment
Despite the elevated inflation and growth slowdown, latest economic data point to economic expansion in the second half, especially in the lead-up to the fourth quarter where more economic activities and jobs are expected.
Unemployment rate in June 2023 declined to 4.5 percent from 6 percent a year ago as the number of unemployed individuals went down from 2.99 million to 2.33 million.
Employment rate in June was estimated at 95.5 percent, higher than 94.0 percent employment rate in the same month last year. In terms of magnitude, the number of employed persons reached 48.84 million in June, up from 46.59 million a year ago.