Thailand
Philippines: Economist warns further rate hike to fuel inflation
MANILA, Philippines — A resumption of rate hikes by the Bangko Sentral ng Pilipinas (BSP) will no longer be effective in restricting the growth of inflation and will instead have the opposite effect, according to an economist.
The Monetary Board of the BSP held policy rates steady in its Dec. 13 policy meeting as inflation has already stabilized and is expected to ease further next year.
The aggressive monetary tightening this year saw policy rates rising by a cumulative 175 basis points since May in response to rapid growth in consumer prices since the start of the year.
Economist Alvin Ang, director of the Ateneo de Manila Center for Economic Research, said any further hikes in interest rates would be useless in keeping inflation in check as it is now widely known that the sharp rise in consumer prices was caused by supply issues, particularly for food items.
Another rate hike would even become a source of inflation for Filipino households as it would increase lending expenses for existing consumer loans.
“The (spike in) inflation was caused by supply issues on which monetary policy has little effect,” he said in a recent interview.
“By raising rates further, a new (source of) inflation would be created. People are no longer spending because consumer items are expensive and now households with existing consumer loans will pay more. This will punish the middle class that is supposed to be helped by cutting (income) tax rates,” he warned.
The government, he said, should rapidly respond to supply issues that caused the spike in inflation this year and to manage expectations while the full effects of the tax reform law moves through the economy.
“A lot of the effort really has to be on supply. Show (the public) supply availability,” he said, arguing this would help manage inflation expectations.
The market widely sees the policy tightening cycle ending with December’s policy meeting.
London-based Capital Economics believes that after holding policy rates steady, the next move of the BSP would be a rate cut next year as the economy has to be supported amid slowing growth and internal and external headwinds building.
Economic growth slowed down to 6.1 percent in the third quarter of the year, in line with median market expectations, as elevated inflation eroded consumer spending.
Third quarter growth tracks the revised second quarter gross domestic product (GDP) growth of 6.2 percent and seven percent in the third quarter of 2017.
Banks like the Bank of the Philippine Islands (BPI) believes an end to a tightening cycle and slowing inflation would give the BSP policy space to bring down the reserve requirement for banks.
BPI lead economist Emilio Neri, Jr. has said the BSP should be encouraged to reduce the reserve requirement ratio (RRR) on deposits of commercial and universal banks which is currently at 18 percent, the highest among the ASEAN-5 countries that include Indonesia, Malaysia, Singapore and Thailand.
Doing so would increase money supply in the economy, therefore boosting economic activity.
Source: https://www.philstar.com/business/2018/12/25/1879665/economist-warns-further-rate-hike-fuel-inflation#93L4jEfcPBVyWsjk.99