EXECUTIVES of the Manulife Investment Management and Trust Corp. (MIM PH) believe inflation and interest rates would continue to dull the economy’s gears.
“We should continue to monitor factors that will drive inflation, such as commodity prices, particularly rice and geopolitical risks. We should also continue to monitor growth components, as reliance on government spending to fuel growth is not sustainable,” a statement quoted MIM PH executive Jean Olivia De Castro. “The country’s high inflation and interest rate environment will continue challenging growth.”
Despite a rebound in the third quarter, household consumption has steadily declined every quarter since last year as high inflation erodes households’ purchasing power, according to De Castro, head of MIM PH’s fixed income unit. Similarly, she said high interest rates discouraged the private sector from borrowing, which dampened private investment.
“As we don’t expect the macroeconomic backdrop to change drastically over the next quarter, there remain downside risks to growth in the next few quarters,” De Castro explained.
Government measures
DE Castro said the Bangko Sentral ng Pilipinas (BSP) has done a lot to control inflation. She noted the 450 basis points of rate hikes in the current tightening cycle, which brought the policy rate up to 6.5 percent—the highest in Asia (same as India).
According to De Castro, the BSP’s hawkish bias in its statements help anchor inflation expectations, emphasizing its willingness to hike should inflation reaccelerate.
“As the source of inflation is mainly supply-side driven, non-monetary measures are needed and have a faster effect in bringing down inflation,” she said.
“For its part, the government has been active in implementing non-monetary measures, which include a cap on rice prices, subsidies and managing the supply of essential commodities through imports, among others,” de Castro added.
MIM PH Equities Head Mark A. Canizares said rice and Christmas spending could put upward pressure on inflation. Rice prices are up around 7 percent in November, driven most likely by the lifting of the cap imposed by the government.
“Meanwhile, Christmas is quite a significant spending season for the Philippines and could put upward pressure on prices monthly,” Canizares said.
Consensus outlook
GENERALLY speaking, the MIM PH executive said, the consensus outlook on inflation is that it will experience a downward trend soon. If this is correct, he said, interest rate policies by the BSP will likely be kept stable, which would signal that interest rates may have already peaked and people could look further ahead for a more pro-growth monetary stance in 2024.
“If interest rates fall, this is typically positive for capital markets such as Equities. Lower interest rates provide more room for corporations to expand and more propensity for consumers to spend, which will translate to higher economic growth and activity, potentially leading to a more robust equities market in 2024,” Canizares explained.
With the BSP’s focus tilted to inflation rather than growth and with inflation still forecasted to remain above its target range, de Castro expects the BSP to keep its monetary policy tight and to consider cutting only later by the second quarter to the third quarter next year, provided we see a continuous deceleration in inflation.
For now, the BSP continues to highlight upside inflation risks, de Castro said.
“And with inflation still forecasted to remain above its target range, we expect the BSP to keep its monetary policy tight and to consider cutting only later by the second quarter to the third quarter next year, provided we see a continuous deceleration in inflation.”