‘Higher-for-longer’ era seen to dampen growth   

The Bangko Sentral ng Pilipinas’ (BSP) higher-for-longer monetary policy stance may be needed to anchor inflation expectations, but analysts warned high borrowing costs will continue to weigh on growth momentum.

National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said the BSP’s view is that without high interest rates inflation will continue to be a problem.

“Inflation, if it persists, will also kill the economy. Inflation spills to other sectors if it persists, even though it initially started from the supply side,” he told reporters over the weekend in mixed English and Filipino.

“This is also the concern that I see, so for us at the Executive branch, we need to be quick in addressing the supply-side issues,” he said.

A Bloomberg report quoted BSP Governor Eli M. Remolona, Jr. as saying the central bank will remain “hawkish for a while.” This means the Monetary Board is “not about to ease… (but) might even hike,” he added.

“If the inflation rate doesn’t go down as projected, we have no choice,” he said on Thursday. “But what we are watching more than the inflation rate itself is the expectations; if they get de-anchored, we’ll have to do something.” 

At its Nov. 16 policy meeting, the BSP kept its target reverse repurchase rate at a 16-year high of 6.5%. The BSP raised borrowing costs by a total of 450 basis points (bps) from May 2022 to October 2023 to tame inflation.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa in an e-mail said the higher-for-longer stance is an example of forward guidance by the BSP, reflecting its commitment to bring down inflation.

“However, there are intended consequences to policy tightening and rate hikes if past and present will continue to weigh on growth momentum, ensuring growth will slow to limit demand-side pressure,” he said.

Mr. Mapa said higher-for-longer policy rates can tame inflation amid easing demand-side pressures, but it could also lead to slower gross domestic product (GDP) growth.

“If cost-side pressures persist then we could still see inflation,” he said. “Monetary policy is not a panacea for all types of inflation after all,” he added. 

Headline inflation slowed to 4.9% in October from 6.1% in September, marking its slowest pace in three months. Still, inflation remained above the 2-4% target for the 19^th straight month.

During the 10-month period, inflation averaged 6.4%. This is still above the central bank’s 6% full-year baseline forecast.

Security Bank Corp. Chief Economist Robert Dan J. Roces said keeping a hawkish monetary policy for two quarters straight can be seen as a way to maintain price stability and fight against inflationary pressures. 

“On the other hand, cutting interest rates can stimulate economic growth by reducing the cost of borrowing for businesses and consumers. This approach may be considered when the economy needs a boost in activity or is facing significant downward pressures,” he said.

Philippine GDP expanded by 5.9% in the July-to-September period, faster than the 4.3% growth in the second quarter but slower than the 7.7% expansion in the same quarter in 2022.

For the first nine months of the year, economic growth averaged 5.5%, still below the government’s 6-7% full-year target.

“Thus, the BSP’s decision to either tighten or loosen monetary policy will depend on a thorough assessment of economic indicators and future projections,” Mr. Roces said. “Right now, the future projection is for inflation to remain elevated given upside risks. Therefore, a good chance of elevated for long.”

Earlier this month, the BSP raised its baseline inflation forecast to 6% in 2023 (from 5.8% in September) and to 3.7% in 2024 (from 3.5%) but cut its 2025 inflation estimate to 3.2% (from 3.4%).

The BSP also gave a risk-adjusted inflation forecast at 6.1% for 2023, 4.4% for 2024 and 3.4% for 2025.

Mr. Roces said the central bank must balance managing inflation and supporting economic growth.

“The central bank will likely make decisions based on careful analysis. Growth is not expected to tank but it will slow given elevated rates and inflation,” he said.

China Banking Corp. Chief Economist Domini S. Velasquez said risks are still on the upside amid tighter food supply due to El Niño, higher electricity rates, and likely wage increases in the coming months.

“We expected BSP to remain hawkish all throughout the first half of next year as there are still some months next year that inflation is expected to overshoot the 2-4% target,” she said.

“Although economic growth is moderating, we do not think that BSP would cut policy rates any time soon given inflationary pressures still,” she added. 

The BSP will have its last policy review this year on Dec. 14. — By Keisha B. Ta-asan, Reporter