Policy tightening seen to continue

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely continue its monetary tightening this year as inflation is seen to remain above target until the second quarter of 2023, analysts said. 

However, economic growth may slow significantly in the next two years, as a result of higher borrowing costs.

BSP Governor Felipe M. Medalla said inflation may have peaked already in December and is expected to settle within the 2-4% target range by third quarter this year.

Headline inflation rose to 8.1% in December, from 8% in November and 3.1% in December 2021, as food prices surged during the holiday season. This brought the average inflation in 2022 to 5.8%, the highest in 14 years.   

“From that point on, we see inflation slowing down in the first half of 2023 and settling between 2-4%, our target range, by the third quarter of 2023,” Mr. Medalla said during the central bank’s first flag-raising ceremony for the year.

“By the fourth quarter, and hopefully for the rest of 2024, inflation is expected to approach the low end of the target range due to base effects,” he said, adding that monetary settings will continue to be guided by data. 

For China Banking Corp. Chief Economist Domini S. Velasquez, inflation momentum slightly eased, as seen with the 0.3% month-on-month increase in December from November’s 0.7%. 

“Inflation’s momentum in December moderated somehow as month-on-month inflation was not as high. However, food prices remained highly elevated, some of which could have been prevented with better domestic supply movements and early recognition of shortages,” Ms. Velasquez said.

“In the next BSP meeting, we expect the BSP to update its inflation projection for 2023. Based on the recent movement in prices, we have actually increased our 2023 average inflation forecast from 4.6% to 5.3%,” she said, adding that food prices may continue to spike.

The BSP currently expects inflation to average 4.5% this year before easing to 2.8% in 2024. 

Higher water rates took effect this month, while electricity rates are also expected to go up. Ms. Velasquez said oil prices are unlikely to go down as much as previously expected with China’s reopening.

“Although inflation will most likely trend downwards starting January, we expect the BSP to continue tightening up to at least 6% in 2023. If other demand side inflationary pressures materialize, such as wage hike increases, they might even increase their terminal rate,” she added.   

STILL ABOVE TARGET

Even though inflation is expected to slow this year, the BSP’s average 2023 inflation forecast is still above the 2-4% official target range, former BSP Deputy Governor Diwa C. Guinigundo said.

“For the BSP to announce its plan to accelerate the disinflation process implies sustained or more aggressive tightening,” Mr. Guinigundo said in a Viber message.

The central bank has raised 350 basis points (bps) last year, bringing its benchmark policy rate to a 14-year high of 5.5% from a record-low of 2% as it sought to tame inflation and help stabilize the peso.   

“I don’t see anything wrong with this decision should it be pursued because the economy seems to have demonstrated its resiliency last year, and is expected to replicate it this year with at least 6-6.5% GDP (gross domestic product) growth,” he said.   

Despite rising rates, GDP expanded by 7.6% in the third quarter, bringing the nine-month average to 7.7%. The government expects GDP to have grown by 6.5-7.5% in 2022, and targets 6-7% growth in 2023.   

The Philippine Statistics Authority is scheduled to release the fourth-quarter 2022 GDP data on Jan. 26.   

“What is more urgent now is to tame inflation because otherwise, it can also restrain economic growth through lower private consumption and investment. What is bothersome is the possibility of getting inflation expectations more entrenched if disinflation takes more time to execute,” Mr. Guinigundo said.   

He noted core inflation continued to accelerate in December, which may reflect significant demand — the target of monetary policy.   

Core inflation, which excludes food and fuel volatile prices, quickened to 6.9% in December from 6.5% in November, marking the fastest print since 7.2% in November 2008. Year to date, core inflation averaged 3.9%.   

The pace of the US Federal Reserve’s policy tightening remains a key consideration for the BSP this year.

“For (2023), we expect BSP to also take its cue from the Fed with rate hikes likely to persist in the first half of the year,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.     

“If the Fed carries out its pivot, the BSP will be able to do its own pivot with a pause in the second quarter of 2023 and rate cuts in the second half next year,” Mr. Mapa added.     

The US Federal Reserve has delivered 425 bps of cumulative rate hikes in 2022, which brought its own policy rate to 4.25-4.5% in order to curb inflation.   

“I think BSP will still hike but at a lesser magnitude,” Sun Life Investment Management and Trust Co. economist Patrick M. Ella said in an e-mail.       

Mr. Ella said the BSP may raise borrowing costs by 25 bps more this year, and pause rate hikes by mid-2023.   

“To be honest, financial institutions can adjust to the elevated rate environment because the consumer can absorb these and 2022 experience shows that,” he added.                 

The Monetary Board is scheduled to meet on Feb. 16 for its first policy meeting this year.

MONETARY POLICY LAG

Mr. Medalla in December said the central bank’s last 50-bp rate increase may reduce GDP by about 7 bps in 2023, and by 19 bps in 2024 due to the lagged impact of policy tightening.    

“If you’re only looking at one rate increase, it’s not that big. Of course, we increased policy rates from 2% to 5.5%, or by 350 bps, so you multiply these numbers by seven,” Mr. Medalla had said in a mix of English and Tagalog.    

The BSP chief added that this is why the International Monetary Fund (IMF) gave a 5% growth forecast for the Philippines this year, significantly below the economic managers’ 6-7% target. 

“But in our view, it’s more important for the public to bring down inflation. High inflation will hurt people more than low GDP growth,” Mr. Medalla said.

With its 350-bp cumulative rate hikes, the BSP has arrested inflationary expectations and managed the volatility in the foreign exchange market, Ms. Velasquez earlier said in an interview with One News.

The local unit closed at P55.755 versus the greenback on Dec. 29, 2022, weakening by P4.755 or 8.52% from its P51 close on Dec. 31, 2021. Still, the peso has strengthened from its record-low close of P59 in October.

“The total effect should happen in 12-18 months. So, since we had (our first rate hike) in May, you’d expect it in 2023, 2024 for the full effect of the monetary policy,” she said.   

In an earlier e-mail, Ms. Velasquez said that in theory, higher interest rates will discourage people from taking out loans.

“With less money at their disposal, consumers will demand less goods and services while businesses may be forced to put off expansion and hiring plans and reduce capital expenditures,” she said.    

“Less consumer demand, capital assets, and labor inputs will then force firms to produce less goods and services. With output lower than before, economic growth would slow and could go into negative territory, especially if the fall in output is widespread across the economy,” she added.

Ms. Velasquez expects economic growth to slow to 5.5-6% this year.

Philippine National Bank economist Alvin Joseph A. Arogo said he sees GDP growing at a slower rate of 5.5% in 2023.

“This is because the purchasing power of consumers is likely to be affected by high inflation, especially as pandemic savings are used up. Moreover, capital formation would likely slow down with the higher interest rates, while government expenditures would likely increase minimally as indicated in the national budget that was recently ratified by Congress,” Mr. Arogo said in an e-mail.

Maybank Investment Bank Chief Economist Suhaimi Bin Ilias also sees GDP growth easing to 5.5% this year, from a projected 7.3% in 2022.

“Any further rate hikes will push BSP monetary policy deeper into restrictive (territory), some that will be detrimental to GDP growth,” he said in an e-mail.

LOOKING BACK

In 2022, the BSP exited its easy monetary policy strategy that was earlier done to support the pandemic-hit economy in 2020.     

Pantheon Chief Emerging Asia Economist Miguel Chanco said the change in the BSP’s leadership sparked a big shift in policy, as it went from former BSP Governor Benjamin E. Diokno’s “conservative hand” to Mr. Medalla’s more hawkish tone.

“Our general view is that the rate hiking cycle was overly aggressive, partly because it’s clear from the data that the economy’s relative strength this year is based on temporary factors and the same can be said about the upsurge in inflation,” Mr. Chanco said.     

Meanwhile, Mr. Mapa lauded Mr. Medalla’s policy decisions after taking over, as he was faced with the peso’s depreciation against a strong dollar while trying to control price pressures at the same time.    

“With the economic data report in hand, Medalla did what few would dare carry out: an emergency meeting as his first act as governor,” Mr. Mapa said.   

The BSP unexpectedly hiked borrowing costs by 75 bps in July, its biggest rate hike ever, following two 25-bp rate increase each in May and June. This was also the BSP’s first off-cycle move since April 16, 2020, when it cut rates by 50 bps to 2.75% to support the economy.    

“A short four months later, the peso has steadied considerably (thanks in part to fading dollar strength) while previously frayed market sentiment has been steadied to close out the year,” Mr. Mapa said.   

“The next big questions for (2023) would be who will take up the mantle of BSP governor after Medalla retires? July 2023 coincides with the projected Fed pivot and the choice of BSP governor will determine how BSP will react to the potential Fed rate cuts in the second half of the year,” he added.

Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said the BSP’s policy decisions for the last three quarters in 2022 has brought “mixed effects” to the economy.    

“On one hand, although it is meant to douse cold water on the consumer’s buying spree and meant to control consumer appetite and at the same time discourage investment spending by way of borrowing, this in effect discourages employment and therefore will increase unemployment,” Mr. Lopez said.    

“Although currently, we are back to pre-pandemic status of 95% employment, if we translate 5% unemployed people, that is still equivalent to approximately 3 million people without work,” he added.    

According to the latest data from the statistics agency, employment rate rose to 95.8% in November, from 95.5% in October and 93.5% in the same month a year ago.

Meanwhile, the unemployment rate eased to 4.2% in November — the lowest in over 17 years. This is equivalent to 2.177 million unemployed Filipinos in November, lower than the 2.241 million in the prior month. – Keisha B. Ta-asan, Reporter