SOCIOECONOMIC Planning Secretary Arsenio M. Balisacan’s openness to further monetary tightening to contain inflation and support the peso could come at the cost of weaker economic growth, economists warned.
This comes as Balisacan last week said the Bangko Sentral ng Pilipinas (BSP) could tighten monetary policy further if necessary, depending on the source and persistence of the pressure on the peso and inflation.
Balisacan also noted that using the country’s foreign exchange reserves could provide only temporary relief, particularly if external pressures persist.
‘I’m sure they are monitoring the situation…So kung kinakailangan mag tighten, ay mag-tighten,’ the government’s chief economists told reporters when asked if the economy could still absorb further rate hikes.
The BSP last month once again hiked its key rate by another 25 basis points, bringing the policy rate to 5 percent. Since April, the Monetary Board has delivered 75 basis points in total.
De La Salle University Economist Maria Ella C. Oplas explained that a further monetary tightening would amount to contractionary monetary policy, which can reduce money supply and demand in the economy through measures such as higher interest rates.
This, in practice, could help lower inflation and potentially support the peso by making the currency more attractive to investors.
‘But it will also lower borrowing, consumption and investment… So yes, the government is willing to sacrifice growth to stabilize peso and bring down inflation,’ Oplas told the BusinessMirror.
If the central bank proceeds with further tightening, however, this could make it more difficult for the government to meet its recalibrated growth target of 3.5 percent to 4.5 percent this year-especially since the economy grew by only 2.6 percent in the first half.
Oplas said weaker growth may be a reasonable short-term trade-off to tame persistent inflation, but prolonged monetary tightening should not become the government’s long-term solution as it could weigh on businesses, consumers, and employment.
Meanwhile, Ateneo de Manila University Economist Ser K. Peña-Reyes said the trade-off reflects the BSP’s mandate to prioritize price stability, even if tighter monetary policy raises the risk of slower economic activity.
For the BSP, bringing inflation back to target takes precedence, while the government should use fiscal policy to support growth and prevent tighter monetary conditions from pushing the economy into a recession.
‘Growth can more easily recover, but inflation, once expectations of it become entrenched, will be much harder to tame. And a high-inflation environment is not conducive to growth,’ Peña-Reyes told the BusinessMirror.
Fiscal stimulus, discipline
FORMER Socioeconomic Planning Secretary Dante B. Canlas said the Department of Economy, Planning, and Development (DepDev) should focus on fiscal measures that can support growth while continuing efforts to bring inflation down.
‘This is surprising coming from DepDev… DepDev is largely growth oriented. Its approach must be geared to disinflation without triggering a recession,’ Canlas told the BusinessMirror.
He added that the DepDev could, for instance, focus on crafting a master plan to address flooding in Central Luzon which is a major contributor to the country’s economic output.
Canlas said this would require a rebalancing of public and private capital, with the government providing public funding for flood control, river maintenance, water impounding and alternative non-toll roads to support privately financed infrastructure such as the North-Luzon and South-Luzon Expressways.
These long-term climate mitigation projects, he said, should be funded through public capital under the General Appropriations Act, rather than leaving privately financed toll roads to bear the burden of inadequate public infrastructure.
‘DepDev is the government agency that brings such an important perspective to master planning the country’s infrastructure system,’ Canlas emphasized.
Oplas added that the government should also tighten its fiscal spending by cutting unnecessary expenditures, ending support for non-performing government-owned and -controlled corporations, streamlining processes, and downsizing or automating government operations.
Balisacan, for his part, said the government is also prioritizing resources to address structural constraints to investment, power and infrastructure to improve the country’s competitiveness over the longer term.
‘We should not approach the issue by just looking at the short term only. You need to be mindful that our choice of response is informed by understanding the trade off [between the] short term versus the longer term,’ he added.