WITH monetary policy having limited scope to support growth, the central bank governor, alongside some analysts, expect the national government to step up by utilizing fiscal space and improving the country’s potential output.
At the policy meeting on Thursday, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. upheld the Monetary Board’s decision to raise the key interest rate for the third meeting in a row this year despite the slower expansion of the Philippine economy.
‘It’s not the policy rate that’s preventing growth. The policy rate is low. It’s 4.75 percent before this increase. With an inflation rate, even if we just use our target of 3 percent, the real interest rate is just 1.75 percent. So it’s not that high when you consider inflation expectations. We still have fiscal space and I think the national government is taking advantage of that,’ Remolona said.
The BSP governor explained that had the central bank opted not to raise the policy rate, ‘it wouldn’t have added significantly to growth.’
Meanwhile, Remolona believes the government ‘has been working strenuously to accelerate infrastructure spending,’ expecting growth to recover by the fourth quarter of 2026.
‘The fundamentals for growth are still in place. So once growth gets going, it will get
going. So we think growth will more or less fully recover by next year,’ added Remolona.
Analysts also expect the central bank to stick to its primary mandate of keeping prices stable despite the weak growth momentum.
Ateneo De Manila University (ADMU) economist Ser Percival K. Peña-Reyes said: ‘BSP Governor Eli Remolona has emphasized that the primary mandate of the BSP is price stability and that monetary policy has limited direct scope to support growth.’
Thus, Peña-Reyes said: ‘It is the government that should utilize fiscal space for economic support.’
‘Historically, we saw faster growth rates even at 6 percent interest rates. Like I said, someone needs to work harder if we are to avoid recession. That’s the National Government-the Department of Finance (DOF), Department of Budget and Management (DBM), and Department of Economy, Planning and Development (DEPDev),’ Peña-Reyes explained to the BusinessMirror on Sunday.
AS such, while the monetary side tightens, Peña-Reyes pointed out that the fiscal side should expand.
‘Of what use is borrowing if it won’t be used for such a purpose, right? That’s why the infra spending will catch up this fourth quarter,’ the ADMU economist told this newspaper on Sunday, speaking partly in Filipino.
Budget Undersecretary Romeo Matthew T. Balanquit earlier told reporters that the government is ‘definitely’ seeing an increase in the third and fourth quarters this year in terms of infrastructure spending.
The DBM recently revealed that infrastructure expenditures and other capital outlays fell to P367.4 billion in the first half of the year due to strict audits and validation of projects-an offshoot, in turn of the massive flood-control fund scandal. The amount was nearly half of the P620.2 billion the government spent for infrastructure in the same period a year ago.
Unanchored inflation
ACCORDING to Peña-Reyes, price stability always comes first for the BSP. He said that central banks view unanchored inflation as ‘deeply damaging’ to long-term economic health.
This, he said, makes rate hikes necessary, even if they ‘constrain’ near-term activity.
In fact, Remolona said the central bank also worries about short-run growth but only to the extent that it affects inflation and the ‘longer-run trend.’
‘We don’t really have the tools to boost growth in the short run at the expense of inflation,’ he added.
As such, Peña-Reyes said that ‘painful as it is,’ the economy can suffer a slowdown now, but there is a need to ensure that inflation expectations remain anchored in the long run.
Earlier, former BSP Deputy Governor Diwa C. Guinigundo told the BusinessMirror: ‘We should not expect monetary policy alone to fix the economy’s growth problem.’
‘If growth is weakening because of supply constraints, high food prices, infrastructure bottlenecks, weak productivity or inadequate investment, lower interest rates cannot by themselves cure those problems,’ Guinigundo also noted.
The former BSP deputy governor said that while an easy monetary policy may stimulate demand, it cannot produce more rice, lower logistics costs or remove structural constraints on production.
That is why, he added, the response of inflation should be broader.
Guinigundo thus prodded the fiscal authorities, trade authorities and ‘especially’ the agriculture sector to address the supply-side sources of inflation while the central bank focuses on preventing second-round effects and keeping inflation expectations anchored.
Improved governance
MEANWHILE, in the view of Emilio S. Neri Jr., Bank of the Philippine Islands’ (BPI) Senior Vice President and Lead Economist, improving governance is ‘key to our country’s growth recovery and not really about keeping interest rates below inflation.’
As such, Neri said: ‘After a serious lapse in the last 4 years, the legislative and executive branches need to step up big time to restore confidence and improve our country’s potential output.’
The BPI’s lead economist warned that ‘all negative side effects will emerge if BSP tries to compensate for inadequate delivery of public sector services and reforms.’
Early this month, the Philippine Statistics Authority (PSA) reported that the economy slowed further to 2.3 percent in the second quarter.
This is slower than the 2.8 percent growth pace in the first quarter and was significantly below the 5.4-percent expansion recorded a year earlier.
The latest reading was the slowest since the first quarter of 2021, when the economy contracted by 3.8 percent.