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Economy to further slow as rates remain high

PHILIPPINE ECONOMIC GROWTH will likely continue to slow as the Bangko Sentral ng Pilipinas (BSP) is poised to hold the policy rate at a near 16-year high for the rest of the year, according to research firms.   

In a note on Monday, BMI, a unit of Fitch Solutions, said the economy’s gross domestic product (GDP) will likely slow sharply to 5.9% this year from 7.6% in 2022, slightly lower than the government’s 6-7% target.   

The BMI’s growth forecast is unchanged from the one it gave in May.

“We think the slowdown will be driven by lackluster global demand and the lagged impact of domestic monetary tightening,” the global research and data firm said.   

Last week, the BSP extended its policy pause for a second straight meeting, keeping the benchmark rate at 6.25%. The Monetary Board has raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023.   

ANZ Research also maintained its growth forecast for the Philippines at 5.8%, also below the government’s target.

“A more challenging backdrop is now emerging due to maturing pent-up demand, fiscal consolidation, lackluster private investment and exports,” it said in its Asia Economic Outlook report for the third quarter.

The Australia-based research firm noted that private consumption may slow, but household spending will continue to be supported by stable remittances from overseas Filipinos and improving unemployment rates.

The Philippine economy expanded 6.4% in the first quarter, its slowest in two years. This was slower than the 8% expansion in the first quarter of 2022 but was within the government’s 6-7% target.

Household final consumption, which contributes around three-fourths to GDP, grew by 6.3% in the first quarter. However, this was weaker than the 7% growth in the previous quarter, and 10% a year earlier.

High borrowing costs will also dampen consumer credit growth, ANZ noted.

Meanwhile, BMI said the BSP is unlikely to further tighten policy this year due to the slowing economic growth.   

“The BSP will try to avoid over-tightening given that it has already hiked by a cumulative 425 bps so far this cycle, which is a much more aggressive pace than most other Asian peers,” it said.   

However, the research firm does not see any rate cuts in 2023 as the peso remains vulnerable to weakness against the dollar due to the interest rate differential of the BSP with the US Federal Reserve. 

“We think that rate cuts will only materialize in the first half of 2024, alongside other major central banks in the world, and we forecast 100 bps of cuts over 2024 to 5.25%,” BMI said.   

The US Fed has hiked its own interest rates by 500 bps since March 2022. The Fed paused its tightening at its June 14 meeting but signaled it may still raise borrowing costs amid sticky inflation and robust US economic activity.

BMI projects the US central bank to hike by 25 bps more at its July meeting, bringing the Fed funds rate to 5.25-5.5%.   

“The end of the Fed’s hiking cycle later this year will relieve pressure on the Philippines’ external sector, which will reduce the need for the BSP to lean towards fresh hikes to defend its currency,” it said.   

“Furthermore, still-elevated inflation will likely prompt the BSP to keep interest rates at multi-year highs to avoid de-anchoring inflation expectations.”

ANZ Research also said the BSP may start loosening policy in the second quarter of 2024. 

“The timing will hinge on the growth trajectory and/or the extent of external pressures, even if inflation stays within the 2-4% official target band,” it said.

BSP Governor Felipe M. Medalla said the Monetary Board may keep borrowing costs at 6.25% at least until the third quarter this year.

“The progress on inflation has also been impressive in the Philippines, plunging 260 bps between January and May. We now believe that headline inflation will revert to the official target range of 2-4% by the end of third quarter this year, earlier than our previous assessment,” ANZ Research said.   

Headline inflation eased to 6.1% in May from 6.6% in April. This marked the 14th straight month inflation breached the central bank’s 2-4% target. Year to date, inflation has averaged 7.5%.

“We now expect headline print to fall below 4% by September 2023. We have revised lower our 2023 full-year average inflation forecast to 5.3% from 5.9% previously, with the main risk being possible dry weather conditions,” ANZ added.   

BMI sees inflation falling to 3.2% by yearend. It also projects a full-year inflation of 5.7%, higher than the BSP’s revised 5.4% forecast.   

The Monetary Board is scheduled to meet on Aug. 17, Sept. 21, Nov. 16, and Dec. 14 to discuss policy. — Keisha B. Ta-asan

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