Philippines – BSP: Economy can withstand rate hikes
MANILA, Philippines — The Philippine economy is strong enough to absorb rate hikes aimed at curbing rising inflationary pressures and stabilizing the peso, according to the Bangko Sentral ng Pilipinas.
BSP Governor Felipe Medalla told participants of a roundtable discussion between key economic officials and US-based business and financial communities in Washington that a 25-basis-point increase translates to about a five-basis-point cut in growth rates.
“Fortunately, the economy is strong enough to withstand the rate increases,” Medalla said during the Philippine Dialogue held on the sidelines of the International Monetary Fund – World Bank Annual Meetings.
The Philippines was able to sustain its strong economic recovery from the impact of the COVID-19 pandemic.
After bouncing back from the pandemic-induced recession with a gross domestic product (GDP) growth of 5.7 percent last year, the economy expanded by 7.8 percent in the first half of the year, exceeding the 6.5 to 7.5 percent target penned by economic managers.
The country slipped into recession with a GDP contraction of 9.6 percent in 2020 as the economy stalled due to strict COVID-19 quarantine and lockdown protocols.
“So it’s a fairly strong economy with very strong demand. If tourism bounces back that will more than offset the effects of the rate increases,” Medalla said.
To tame inflation and stabilize the peso, the central bank’s Monetary Board has so far raised key policy rates by 225 basis points, bringing the overnight reverse repurchase rate to 4.25 percent, the highest since 4.5 percent in June 2020.
Medalla pointed out that the hawkish US Federal Reserve that delivered aggressive rate hikes to fight inflation, the impact of the Russia-Ukraine war, and the weakening peso have prompted the BSP to withdraw COVID-19 support measures earlier than expected.
Inflation averaged 5.1 percent in the first nine months, exceeding the BSP’s two to four percent target range after accelerating to 6.9 percent in September from 6.3 percent in August.
The BSP Monetary Board sees inflation exceeding the target range and average 5.6 percent instead of 5.4 percent for this year and 4.1 percent instead of four percent for next year.
With the US dollar serving as a safe haven amid the uncertainties, the peso has weakened by about 15.7 percent so far this year to touch an all-time low of 59 to $1 last Oct. 3, 10 and 13.
Medalla earlier said in an interview with Bloomberg Television also in Washington that the Monetary Board could likely hike interest rates by another 50 to 75 basis points during its next rate-setting meeting scheduled on Nov. 17 as the US Fed is likely to deliver more aggressive increases as inflation soared to a 40-year high of 8.2 percent in September.
The BSP chief already discounted the possibility of another off-cycle rate setting meeting for the remainder of the year. It would be recalled the Monetary Board delivered a huge 75-basis-point hike during a surprise off-cycle meeting last July 14.
“To summarize, BSP is committed to bringing inflation back to a target consistent path. It will take all the necessary measures including raising interest rates to match the US Fed actions,” Medalla said.
According to Medalla, inflation is seen returning to within the two to four percent target in 2024 and the BSP will continue to use the gross international reserves (GIR) to stabilize the movement of the peso against the US dollar.
“The Philippine economy has problems but it can navigate in these uncertain times,” Medalla said.
Source: https://www.philstar.com/business/2022/10/16/2216934/bsp-economy-can-withstand-rate-hikes