WITH the Philippine economy showing signs of stagflation, there’s a chance, albeit slim, that Bangko Sentral ng Pilipinas (BSP) may resort to hiking policy rates down the road despite the ongoing slowdown in business activities.
Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort, in an interview with the BusinessMirror, said while the early signs of stagflation—inflation spike converging with economic contraction—were seen, these are but temporary, given that commodity prices rose with the damage caused by recent typhoons and the impact of African Swine Fever (ASF).
The price increases, he said, can still be addressed by non-monetary measures.
The Philippine economy declined by 9.5 percent on average last year after plunging in all quarters. In addition, consumer price growth reached 4.2 percent in January, higher than the BSP forecast.
Meanwhile, De La Salle University (DLSU) economist Maria Ella C. Oplas told this newspaper that contraction in gross domestic product (GDP) was expected, given the economic slump due to pandemic-induced lockdown measures. Oplas was also “hesitant” to categorize the Philippines as an economy in recession-inflation, sharing Ricafort’s sentiment on the recent uptick in consumer price growth.
Still, should there be “second-round inflation effects,” the RCBC economist said that these “could result in some changes/tightening in monetary policy to better manage actual inflation as well as inflation expectations, particularly some upward adjustment in the local policy rate from the record low of 2 percent.”
The potential policy rate hike would then increase the key short-term interest rate benchmarks that are used to price both deposits and loans, Ricafort added.
‘Slim’ possibility
While rate cuts are likely off the table for now, Bank of the Philippine Islands (BPI) Lead Economist Emilio Neri Jr. said there is also a “slim” possibility that BSP will consider hiking interest rates, especially if inflation remains elevated. BPI forecasts inflation to settle at 4.3 percent this year, which is above the government’s full-year target band of 2.0-4.0 percent.
“However, if fiscal stimulus can complement monetary easing, BSP can hike rates with minimal interruption on the growth recovery, and may limit the damage on markets especially when carried out with credibility,” he said in a recent research note.
Should the Central Bank hike policy rates, it would be the first time in a year after cutting by 200 basis points in 2020 to boost liquidity in the financial system.
Continued lending
For Oplas, it may be counterintuitive to hike policy rates given that households and companies of varying sizes need access to affordable financing to recover. “I lean on maintaining the low interest rate rather than increasing it to lower inflation,” she explained.
If the economy indeed is in stagflation already, the DLSU economist stressed that loans are needed to fund the recovery of various sectors, especially the micro, small and medium enterprises (MSMEs). Higher cost of borrowing may hamper recovery, she added.
But access to financing is not enough to alleviate the economy, Oplas stressed, adding that rollout and inoculation of Covid-19 vaccine is a must to spur business activities.
“We need to still focus on being productive,” she said. “Kasi even if pahiramin natin nang pahiramin ang MSMEs, if the economy is closed paano sila kikita [Even if the banks continued to lend to MSMEs, their operations will not yield profits if the economy remains closed].”
With this, she said banks will find it even more difficult to collect payments from their borrowers, resulting in bad loans.
While the BSP has injected much needed liquidity in the economy, demand for loans has remained anemic, Neri noted.
“We also reiterate our view that monetary policy has done so much already, and overdependence on it will likely provide marginal benefits,” he said. “Interest rates have been low for many months, and yet loan growth continues to slow down and may soon plateau.”
The outstanding loans of universal and commercial banks contracted by 0.7 percent in December 2020, the first in 14 years. Bank lending growth slowed down because financial institutions were risk averse amid the pandemic, BSP said.
Addressing inflation
To prevent BSP from hiking policy rates, Ricafort said inflationary pressures should be addressed.
Consumer price growth in January was mainly driven by food prices, particularly pork, along with agricultural products, the RCBC economist noted.
These can be tamed through non-monetary measures such as increasing local production and importation of food and other agricultural products to boost the supply side, he said. The 60-day price control on pork and chicken, Ricafort said, can also ease overall inflation.
With this, Ricafort said it would be helpful for the banks and financial institutions to provide more credit facilities to related sectors so they can fund their supply chain.
The Central Bank is set to have its first monetary policy meeting on February 11.