THE more aggressive adjustments recently made by the Bangko Sentral ng Pilipinas (BSP) to counter inflation will not likely threaten the country’s growth prospects for this year, economists said.
The country’s economy will still continue to thrive amid tighter monetary conditions, owing to the well-calibrated nature of the adjustments, economists Luz Lorenzo of MayBank Kim Eng and Emilio Neri Jr. of the Bank of the Philippine Islands (BPI) said.
The two economists, in different research notes, said that, while their inflation projections may be at risk this year up to the next, their forecasts of the country’s gross domestic product (GDP) growth remain unchanged, even if monetary conditions have increasingly changed over the past months.
“We believe the economy can continue to grow because of the measured pace of monetary tightening, as well as the impact being muted by adequate liquidity,” Lorenzo said.
She also said that, while the liquidity growth dropped to a 14-month low in July this year, it was still “more than enough” to fund strong growth in the country.
Likewise, even if the central bank implements another round of tightening measures in its last two policy-stance meetings for the year, the country’s GDP growth is still expected to be within place, Lorenzo added.
GDP projections attainable
“GIVEN the mild character of the expected hikes, we believe the Philippines’s GDP growth projections remain attainable under this scenario even if meeting next year’s inflation target will be at risk,” Neri said.
Both expressed unchanged GDP projections for the year, For Lorenzo, he forecasts the economy to grow by 6.7 percent. this is within the government’s target of 6.5 percent to 7.5 percent this year but lower than the 7.2-percent growth seen in the previous year.
Neri, meanwhile, said that the 6.2-percent growth forecast for 2014 is also uninfluenced by the tighter monetary conditions set last week.
In its sixth meeting for the year on Thursday, the central bank decided to take a more aggressive step in combating the continuously high inflation trajectory of the country by hiking both its interest rates in overnight rates and special deposits account (SDA) interest by 25 basis points each. This is the most aggressive move of the central bank since May 2011.
Tighter monetary conditions—particularly higher interest rates—are usually implemented to effectively lower the demand for funds in an effort to tame inflationary pressures, causing some worry over the demand side’s contribution to the country’s GDP now that the Bangko Sentral ng Pilipinas transitioned from accommodative monetary conditions last year to tighter this year. SDA adjustments, meanwhile, are target to siphon excess liquidity in the system that may also cause inflationary pressures.
While these moves may not hinder the growth of the country, BPI’s Neri warned that the rundown of infrastructure will likely be the culprit to the country’s lower productive capacity.
“Failure of existing transportation systems [MRT-3 breakdown, port congestion in Manila] and energy resources [rotating brownouts] to keep up with the economy’s growth have been the glaring examples,” he said.
More rate hikes likely–Nomura
Nomura International Ltd. expects more rate hikes ahead after the BSP raised both benchmark and SDA rates by 25 basis points.
Nomura analysts Euben Paracuelles and Lavanya Venkateswaran said in a reasearch paper: “Statements from BSP officials so far look decisively hawkish, in our view. BSP said the move was to preempt second-round inflationary effects.
“Despite this upward revision, BSP continued to highlight inflation risks ‘lean to the upside’ from food and utility prices and ‘above trend’ credit growth. Lastly, BSP noted that the strength in domestic demand gave it scope for further action.”
The two added: “As such, we reiterate our forecast of another 50 basis point of hikes to the benchmark rates this year and the SDA rate to move in lockstep.”
The BSP Monetary Board believes that continued favorable prospects for domestic demand, as shown by stronger GDP growth in the second quarter—allow some scope for further adjustment in policy rates.
