No need to rush rate hikes, says think tank

THE Philippines is expected to recover below the government’s target range for the year as demand has not yet fully recovered in the country, the recent assessment of the Asean+3 Macroeconomic Research Office (AMRO) showed.

In the release of their annual flagship report, the Asean+3 Regional Economic Outlook (AREO) on Tuesday, AMRO chief economist Hoe Ee Khor also said they do not see an urgent need for the Bangko Sentral ng Pilipinas (BSP) to raise interest rates, but have the space to do so. 

The AMRO chief economist said they expect the country to grow 6.5 percent in 2022, recovering from the 5.7-percent gross domestic product (GDP) growth in 2021. This is, however, a tad short of the government’s 7 to 9 percent target range. 

“This year we expect growth to improve to 6.5 percent. This will be led by government spending and also recovering private sector spending,” the AMRO economist said. 

“The Philippine economy has a pretty large output gap. So we expect that private spending will bounce back very rapidly once the economy is open much more fully. So we are quite confident that you know this six and a half percent growth can be achieved this year,” he added. 

AMRO also forecasts a growth of 6.5 percent for 2023. 

Rate hike not urgent

The regional think tank also said inflation is expected to remain relatively high throughout the year, but since they are driven largely by supply side factors, there is no need to urgently raise interest rates by the Bangko Sentral ng Pilipinas (BSP). 

“Inflation has ticked up above the upper band of the target band. So, we expect inflation to remain above the target band for most of the year. This inflation is driven mostly by increases in fuel prices and food. So they are basically supply-driven supply shocks,” the AMRO economist said. 

“As I mentioned earlier, the Philippine economy still has a negative output gap. They have not fully recovered to prepandemic levels. So demand is still low. I wouldn’t say it’s very weak, but it’s still modest,” he added.

Inflation registered 4 percent in March this year, hitting the ceiling of the government’s target band for the year at 2 to 4 percent. In their March 24 monetary policy meeting, BSP Governor Benjamin Diokno said they see inflation averaging at 4.3 percent for this year. 

Despite this, AMRO does not see the urgent need to raise interest rates, which are currently on record lows as the monetary policy support for the economy at the height of the pandemic is still in place.

“I think, you know, if inflation is likely to decline down to within the target band by next year, and we don’t see the need to raise policy rates, per se,” the AMRO economist said. 

“Having said that, it’s important to make sure that inflation doesn’t become entrenched. And there’s scope I think for the BSP, for the central bank to start considering withdrawing some of the policy stimulus you know, as the economy continues to gain traction and growth continues to recover,” he added. 

The BSP is expected to hold its next monetary policy meeting on May 19. 

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