BSP urged to remain  hawkish in next 2 years

The Bangko Sentral ng Pilipinas (BSP) should retain its tightening bias as forecasts show inflation will remain elevated until 2025, GlobalSource Partners said. 

“All in all, we believe the BSP should remain hawkish in both its policy moves and policy pronouncements. The forecasts indicate above-target inflation for this year, and we agree as to its likelihood, and the next,” GlobalSource Country Analyst Diwa C. Guinigundo said in a report dated Nov. 22.

The BSP’s baseline inflation forecast this year is at 6%, still well above its 2-4% target band. It sees inflation easing to 3.7% for 2024 and 3.2% for 2025.

The Monetary Board kept its key policy rate unchanged at a 16-year high of 6.5% at its Nov. 16 meeting, after hiking by 25 basis points (bps) in an off-cycle move last month. 

Since May 2022, the BSP has raised rates by a cumulative 450 bps to tame inflation. The Monetary Board is set to have its final policy-setting meeting this year on Dec. 14.

“For 2025, we argue for sustained tightening for at least two reasons. One, inflation forecasts are quite close to the upper end of the inflation target and two, credit and economic growth remain intact. There is enough space for monetary cautiousness. The biggest risk is the inability of those nonmonetary interventions to make a difference,” Mr. Guinigundo added.

Mr. Guinigundo, a former BSP deputy governor, said that risk-adjusted inflation forecasts are more “realistic.”

The central bank’s risk-adjusted inflation forecast is higher at 6.1% for 2023, 4.4% for 2024, and 3.4% for 2025.

“These (risk-adjusted) forecasts incorporate potential game changers including higher power and petroleum prices, and higher minimum wages in areas outside Metro Manila, including the impact of prolonged El Niño conditions. Transport fare adjustments and nonmonetary interventions were also considered,” he said.

In a follow-up Viber message, Mr. Guinigundo said that the BSP could potentially “start pausing and ultimately reducing the policy rate” if its risk-weighted forecasts show inflation in 2025 would fall within the 2-4% target.

“Monetary policy works with a long and variable lag — so they need to act fast as soon as they see a clear trend of inflation moderating to within target. Otherwise, they should remain cautious or at least pause. Again, their move will be driven by data and forecasts,” he added.

‘Tall order’
Meanwhile, GlobalSource said that achieving the government’s 6-7% economic growth target this year will be a “tall order.”

“Based on the third-quarter outcome, it is difficult to share the optimistic view of the country’s economic managers that the current (growth) target of 6-7% is still achievable,” Mr. Guinigundo said.

The Philippines’ gross domestic product (GDP) expanded by 5.9% in the third quarter, faster than 4.3% in the second quarter but slower than 7.7% a year earlier.

For the first nine months, economic growth averaged 5.5%. The economy would need to grow by 7.2% in the last quarter to hit the lower end of the government’s target.

Mr. Guinigundo said that the economy’s demand-side drivers have been weak, particularly in private consumption, which accounts for about three-fourths of GDP.

“There has been a perceptible slowdown in household final consumption since the first quarter of 2022, an obvious result of base effects and revenge spending after the pandemic lockout. Since then, private consumption growth has consistently decelerated,” he said, adding that high prices of food and other goods have also curbed consumer spending.

Despite the rebound in government spending, Mr. Guinigundo said that there is “very little left” to fuel growth in the last quarter.

The government’s 6.5-8% growth target for next year will also be hard to reach, GlobalSource said.

“The downsides are just too great, coming from the depressed global economic scenario, unavoidable slowdown from the peak of the credit cycle, COVID scarring in education and the labor market, AI’s negative impact on overseas Filipino workers’ business process outsourcing potential, and the challenge of converting those official government-sponsored investment roadshows into actual foreign direct investments,” Mr. Guinigundo said. — By Luisa Maria Jacinta C. Jocson, Reporter