BSP policy rate seen at 5.25% by yearend despite weak growth outlook

THE Philippines’ high exposure to inflation risks could prompt the central bank to tighten its monetary policy further despite its weak growth prospects, Oxford Economics said.   

In a report dated Aug. 11, the United Kingdom-based think tank said the Bangko Sentral ng Pilipinas (BSP) could still deliver an additional 50 basis points (bps) in rate hikes to 5.25% this year. 

This comes even as they see most central banks in emerging markets pausing amid persistent uncertainty arising from the Middle East war. 

“We expect most central banks will keep rates on hold as uncertainty regarding the Middle East conflict lingers,” Oxford Economics Lead Economist Maya Senussi said. “We only forecast additional hikes in the Czech Republic, India, Indonesia, the Philippines, and South Africa.”

According to Ms. Senussi, the country’s vulnerability to price shocks warrants a higher-for-longer policy even as its growth outlook looks bleak.

“The Philippines remains the most exposed to inflation risks and we expect another cumulative 50 bps worth of tightening despite soft growth prospects,” she said. 

Meanwhile, Citi Philippines also maintained its forecast of up to a fourth straight hike, although weighing a potential pause in October amid a widening output gap and easing inflation.

“No change in our BSP rate call; still expecting 25-bp hikes in August and October, while monitoring the risk scenario of an October pause,” it said in an e-mailed note on Wednesday. “The continued slowing of GDP (gross domestic product) growth in the second quarter was accompanied by elevated unemployment, thus likely a wider output gap.”

BSP Governor Eli M. Remolona, Jr. has said that the economy continues to suffer from a negative output gap especially after domestic growth slowed for a fourth straight quarter.

An economy posts a negative output gap when its actual output is less than its full potential.

In the second quarter, Philippine GDP grew by 2.3% — its lowest since the pandemic. This came as investments took a major hit from the decline in public construction, while household spending suffered from the sharp rise in consumer prices.   

The country’s unemployment rate climbed to a three-month high of 4.9% in June from 3.7% a year earlier, translating to 2.59 million jobless Filipinos. The unemployment rate averaged 5% in the first half.

On the other hand, Citi noted that stronger growth in goods and services exports provided some relief for the Philippine economy in the second quarter.

“Exports of goods and services (+1pps in contribution to growth) were also a bright spot,” it said. “Worth noting that half of the growth in exports was contributed by services, perhaps allaying concern over structural headwinds caused by AI (artificial intelligence).”

However, Oxford Economics said this uptick in exports was still insufficient to boost the economy’s overall growth during the period.

“The Philippines has also benefited through stronger exports, although its concentration in testing, assembly, and packaging likely will generate more limited domestic spillovers. Its recent Q2 GDP print shows domestic demand is weak even as exports grow,” Ms. Senussi said.

As of June, the country’s total exports grew by 13.09% year on year to $46.72 billion from $41.31 billion. This is projected to rise by 3% for the full year, based on the Development Budget Coordination Committee’s latest outlook.

For Citi economists, the economy could rebound in the third quarter as inflation continues to cool down, investment growth turns around, and exports growth remains at a double-digit pace.

However, it ruled out a sharp recovery, noting that risks could emerge if remittance inflows from the Middle East stay subdued, and the upcoming El Niño event triggers another price shock.   

The central bank has also remained optimistic about the economy’s second-half outlook, counting on the government’s catch-up measures to lift growth in the latter part of the year.

Citi kept its full-year GDP growth forecast for the Philippines at 3.2%, below the government’s 3.5%-4.5% target.

MEASURED APPROACH
In a separate report, De La Salle University’s Angelo King Institute for Economics and Business Studies (DLSU-AKI) said economic managers must continue taking a measured approach to oil price shocks to avoid worsening the economy’s vulnerability in the future.

“Oil price shocks will continue to test the Philippines,” DLSU-AKI researchers Jan Marie Claire Edra, Junette A. Perez, and Edwin Valeroso said.

“This calls for a more careful response: not panic tightening or open-ended subsidies, but a calibrated mix of credible monetary policy, targeted relief, transparent fuel markets, supply buffers, and faster energy diversification,” they added.

Since the Middle East war erupted in late February, the BSP has maintained a measured monetary policy stance as it warned against potential market disruption should it turn aggressive. 

“For the Bangko Sentral ng Pilipinas, the danger is misreading a supply shock as a demand shock,” the DLSU researchers said. “Raising rates too much in response to a temporary oil spike can slow output and credit growth without producing more oil. Doing too little, however, can also be risky if transport fares, wages, food prices, and expectations begin to adjust together.”

According to the authors, the BSP can look past immediate oil price shocks and act only when such pressures begin to feed into expectations and costs of other commodities.

“Keep monetary policy credible but avoid overreacting to temporary oil movements. The BSP should continue distinguishing first-round oil price effects from second-round pressures. A rate response is more justified when oil shocks start changing inflation expectations, wages, transport fares, and core prices,” they said.

The Monetary Board has so far delivered two 25-bp hikes since April, bringing its benchmark interest rate to 4.75% by June.

Headline inflation remained above the BSP’s target as well as its 4% ceiling since the first full month of the Middle East war in March. It stood at a year-to-date average of 5%, still below the BSP’s 6.4% full-year estimate, after easing for a third straight month to 6.2% in July.

Earlier this week, the central bank chief said they could still tighten “as much as necessary” to drive inflation near its 3% target, but added that the sluggish growth last quarter has eased some pressure off their rate hike prospects.

The Monetary Board will hold its fourth rate-setting meeting this year on Aug. 27, with the last two scheduled for Oct. 22 and Dec. 17. — Katherine K. Chan