WITH inflation to have slightly cooled in February, local and international think tanks believe the Bangko Sentral ng Pilipinas (BSP) will raise interest rates by only 25 basis points (bps) on Thursday.
The First Metro Investment Corp.-University of Asia and the Pacific (FMIC-UA&P) Capital Markets Research believes the increase in key rates will not dampen the country’s growth, which the local think-tank expects to hit 7.1 percent in the first quarter.
The last time the Monetary Board raised interest rates by 25 bps was in June 2022 when it raised the interest rate on the BSP’s overnight reverse repurchase facility to 2.5 percent.
“We expect the BSP to hike policy rates by 25 bps in its March meeting to 6.25 percent, but this won’t suffice to stem the depreciation tendency of the peso given the Fed’s resolve to raise its policy rates by 25 bps in March and in May and the Philippines’s burgeoning trade deficits,” the local think tank said.
The think tank expects the BSP to increase key rates by another 25 bps following an upside risk that the Federal Reserve will hike policy rates by 50 bps in March.
FMIC-UA&P Capital Markets Research believes the BSP will not “extinguish the economic recovery momentum” by raising interest rates further.
BSP Governor Felipe M. Medalla earlier said a 50-bps increase in policy rates would have less than a percentage-point reduction in gross domestic product (GDP) growth.
“Despite high inflation and negativity that troubles many minds, we think the economy is far from being down and out. Rather, the robustness remains until some more dramatic (unlikely) negative event(s) demolishes it,” FMIC-UA&P Capital Markets Research said.
Sticky inflation
MEANWHILE, Moody’s Analytics expects central banks in countries like the Philippines that are still experiencing high inflation will continue raising interest rates one or two more times this year.
These countries, apart from the Philippines, include Australia, India, and Vietnam. The central banks may keep raising rates while monitoring the impact of “tightening of lending standards does some of the heavy lifting for them.”
In the Philippines, Moody’s Analytics said the country is “battling some of the stickiest inflation in the Asia-Pacific region” which has prompted monetary authorities to raise interest rates.
It said cumulative hikes done by the BSP reached 400 basis points since May last year. Moody’s Analytics said inflation is being driven by demand-side and supply-side factors.
“With inflation still too high, [the] BSP will want to prevent what it calls the ‘emergence of additional second-order effects’. However, the small easing in inflation in February, which contrasted with BSP’s expectation for an increase, could give the central bank confidence to step it back,” Moody’s Analytics said.
Growth drivers
THE local think tank said the Philippine economy’s growth drivers in the first three months of the year include manufacturing, employment, and national government spending.
“While the data do not readily show blinking bright lights, digging a bit beneath the surface does provide a sufficient basis for good expansion in the first quarter of 2023,” FMIC-UA&P Capital Markets Research said.
“Add to that the real income effect of the personal income tax cuts and strong overseas Filipino workers (OFW) remittances at a higher exchange rate than a year ago, and so we see GDP growth of 7.1 percent in Q1-2023,” it added.
The think tank said the Volume of Production Index (VOPI) was off to a good start in 2023 by posting a growth of 10.6 percent, the fastest in 10 months.
The growth was driven by higher increases in factory output for 17 out of 22 major industry categories, fueled by the above-10 percent expansion in eight categories out of the 17 categories.
In terms of employment, the think tank said the latest data showed the economy employed fewer Filipinos but still showed a 10.1 percent increase year on year.
It expects employment figures to show improvement starting in February when the weather permitted more travel, eating out and construction work.
FMIC-UA&P Capital Markets Research said the government’s total spending rose 10.4 percent to P5.2 trillion in 2022 from P4.7 trillion in 2021.
This was driven by higher National Tax Allotment shares of local government units, higher capital expenditures, defense modernization projects, personnel services expenses, and interest payments.
Image credits: Patrick Roque via Wikimedia Commons CC BY-SA 4.0
