phil02

Philippines: Rate hike may dent demand, employment

MANILA, Philippines — The impending interest rate liftoff by the Bangko Sentral ng Pilipinas (BSP) may dent demand and employment recovery, especially in the absence of fiscal support to cushion the economy from higher borrowing costs, according to Moody’s Analytics.

It said the Philippine economy has surpassed pre-pandemic levels of output after its gross domestic product (GDP) expanded by 8.3 percent in the first quarter, building on the revised 7.8 percent growth in the fourth quarter of 2021.

However, the quarter-on-quarter growth eased to 1.9 percent from 3.5 percent in the previous quarter, but is still favorable as private consumption and investment improved and export growth held up.

“Despite a largely favorable March-quarter performance, the risks to our outlook are tilted to the downside. Chief among them is inflation. Higher prices for food and fuel are challenging the central bank’s accommodative monetary policy settings,” Moody’s Analytics said.

The research arm of the Moody’s Group said there is increasing pressure to arrest inflation pressures by hiking interest rates as early as this month.

“The timing and pace of interest rate tightening could dent demand and employment recovery, especially in the absence of sizeable fiscal support to cushion the economy,” Moody’s said.

Inflation quickened to 4.9 percent in April, the highest in more than three years and exceeding the BSP’s two to four percent target due to higher fuel and food prices.

After slashing interest rates by 200 basis points to record lows in 2020 as part of its COVID response measures, the BSP maintained an accommodative monetary policy stance since November 2020 to boost economic activity.

“We expect that monetary tightening will be calibrated to protect growth,” Moody’s Analytics said.

It said households would be the focal point when it comes to higher borrowing costs.

“They will face stronger headwinds over the next year, softer house price growth and higher living costs will add pressure to household budgets. This is particularly so for lower income groups, which don’t have the savings buffer that others build during the pandemic,” it said.

Security Bank chief economist Robert Dan Roces said there are pockets of uncertainties despite the strong growth in the first quarter, but expects better mobility to result in robust economic expansion.

Roces expects the Monetary Board to deliver a 25- basis-point rate hike on Thursday.

For his part, UnionBank chief economist Ruben Carlo Asuncion said the BSP is likely to take special note of the recent hotter-than expected GDP growth performance in the first quarter.

“Thus, we may see a 25- basis-point monetary policy hike. However, another scenario can play out and the Monetary Board may hold current key interest rates until they see the inflation number of May,” Asuncion said.

The chief economist of the Aboitiz-led bank said the BSP could also hold rates at record lows this May and instead hike in June, a 50 basis points if year-to-date inflation breaches above its inflation target range of two to four percent.

“Nevertheless, if the Monetary Board indeed decides to hike this week, we expect another 25 basis points this June to further tame rising inflation,” Asuncion said.

Source: https://www.philstar.com/business/2022/05/17/2181546/rate-hike-may-dent-demand-employment