THE slower growth rate of the Philippine economy in the second quarter has reduced the pressure for the central bank to raise the key interest rate, its governor said Monday.
Following the release of the second quarter gross domestic product (GDP) data last August 7, the governor of the Bangko Sentral ng Pilipinas (BSP) was asked if the pressure to hike rates was reduced.
BSP Governor Eli M. Remolona Jr. replied to reporters, ‘Yes.’
Prior to his affirmation, however, the central bank governor explained the balancing act that the BSP-the institution whose primary goal is to keep prices stable-has to consider, against the backdrop of subdued economic activity.
‘We’re focused mainly on inflation but we also consider the output gap,’ Remolona said.
Normally, he said inflation weighs heavily on the central bank’s monetary policy decisions given its price stability mandate.
However, Remolona emphasized: ‘Growth is implied by the inflation mandate. If you can maintain price stability, that tends to sustain growth.’
In the short run, however, the BSP governor said, ‘Sometimes there are problems with growth. And we take that into account. We don’t ignore that.’
Last Friday, the Philippine Statistics Authority (PSA) reported that the growth of the Philippine economy in the second quarter slowed to 2.3 percent from the 2.8 percent in the first quarter.
The latest reading was the slowest since the first quarter of 2021, when the economy contracted by 3.8 percent.
Excluding the pandemic period, it was the weakest growth recorded since the fourth quarter of 2009, when gross domestic product (GDP) expanded by 1.8 percent.
Two days before the release of the growth print or last Wednesday, the PSA reported that headline inflation eased to 6.2 percent in July from 6.4 percent in June.
The latest reading extended the downtrend from the 7.2-percent peak in April. Inflation eased to 6.8 percent in May and 6.4 percent in June, bringing the year-to-date average to 5 percent.
When asked, however, if the easing of headline inflation for the third straight month would rule out further rate hikes, Remolona said: ‘Hindi masyadong downtrend, eh. Yung core [inflation] one data point lang yung binaba. Yung headline bumaba ng ilang beses na.’
Core inflation, which strips out selected volatile food and energy items, eased to 4.2 percent in July from 4.4 percent in June.
According to Remolona, core inflation is a ‘good focus’ instead of the headline inflation.
‘Because the core [inflation] we can control, but the headline inflation is impacted by many supply shocks,’ added the BSP governor, partly in Filipino.
Both headline and core inflation, however, remained above the central bank’s 2 to 4 percent target range.
Further pressed if the Monetary Board would deliver one last rate hike at its upcoming August 27 rate-setting meeting, Remolona, who also chairs the MB said, ‘As much as necessary to bring inflation down to target.’
Analysts’ take on recent signal
Sought for comment, local experts shared mixed views on what the BSP chief might have meant as he agreed that the pressure of the central bank to raise the key interest rate has been reduced.
For one, Bank of the Philippine Islands (BPI) Senior Vice President and Lead Economist Emilio S. Neri Jr. told the BusinessMirror: ‘Gov was probably just shooting from the hip. I would rather wait until the August 27 meeting is close to hear his most recent comments before I share our opinion.’
Meanwhile, Jonathan L. Ravelas, senior adviser at Reyes Tacandong and Co., told this newspaper that the central bank may be delivering fewer hikes moving forward.
‘Balancing act between growth and falling inflation. My take is less hikes. But looking at 25 basis points hike on the 27,’ he also told this paper.
With the low domestic demand, analysts said over the weekend that there may no longer be ‘much room’ for the central bank to raise the key interest rate beyond the August 27 rate-setting meeting of the Monetary Board.
For one, United Kingdom-based research firm Capital Economics said the continued weakness of the economy means the case for further hikes is less clear-cut.
But with inflation still well above target, Capital Economics expects one more quarter-point hike on August 27, before it calls a halt to its hiking cycle.
The BSP has raised the key interest rate by a total of 50 basis points since the start of the conflict in the Middle East, delivering two separate quarter-point rate hikes at the Monetary Board’s rate-setting meetings held on April 23 and June 18.
These policy actions brought the Target Reverse Repurchase (RRP) Rate to 4.75 percent.
During its June 18 meeting, the Monetary Board decided that monetary policy tightening was ‘warranted’ to keep inflation expectations anchored and mitigate the risk of second-round effects.
‘The measured monetary policy action will also complement fiscal measures in supporting steady consumption and strengthening business sentiment,’ the central bank also said in a statement on June 18.