BSP confronts ‘difficult’ balancing act amid heated inflation, tepid growth

The Bangko Sentral ng Pilipinas (BSP) faces a delicate balancing act as its efforts to bring down still-hot inflation weigh on a weakening economy, with broadening price pressures also threatening to further delay recovery.

According to the central bank, the economy is now facing the twin challenge of heated inflation and tepid growth.

However, it vowed to keep inflation in check to ensure economic growth recovers sustainably while it upholds its price stability mandate.

“In the face of a difficult combination of elevated inflation and slowing economic growth, the BSP remains determined to fulfill our mandate of pursuing price stability conducive to sustained and balanced growth,” it said in a statement issued late on Wednesday.

The BSP’s remarks came amid growing calls to hit pause on monetary policy tightening after a fifth straight quarter of slowdown.

Gross domestic product (GDP) growth slowed to 2.1% in the July-to-September period, as soaring prices further dampened household consumption while agricultural output and investments declined.

This was the economy’s worst performance since the pandemic or when it contracted by 3.8% in the first quarter of 2021.

Outside the pandemic, it was the slowest expansion in almost 17 years or since 1.8% in the fourth quarter of 2009.

GDP growth averaged 2.5% in the nine-month period, well below the government’s 3.5%-4.5% full-year target.

Last week, Economy Secretary Arsenio M. Balisacan told a press briefing that the economy will feel the impact of the BSP’s inflation-targeting rate hikes over the coming months.

He noted, however, that the BSP’s tightening is “not necessarily bad for growth” as taming inflation would eventually help boost consumption and investments.

Under its price stability mandate, the central bank raises its key rates to rein in inflation and keep inflation expectations anchored, particularly by tempering the second-order effects of price shocks on wage- and price-setting behavior.

“Since monetary policy is unable to control the direct inflationary effect of recent global supply shocks, it focuses on the second-round effects of such shocks,” the BSP noted.

However, tightening usually comes at the expense of economic growth as it curbs aggregate demand and spending through higher borrowing costs.

Inflation-growth balance

As the economic slowdown drags on, the central bank said it is weighing the implications of the third-quarter growth reading on the inflation outlook.

It also noted that it will consider both weak demand and the need to keep inflation expectations anchored in its efforts to rein in second-order price effects.

“In the BSP’s efforts to bring inflation down, it takes important account of the weakness in aggregate demand. It is also mindful of the need to prevent the de-anchoring of inflation expectations,” it added.

Inflation has been above the BSP’s 3% target since March, when the Middle East war-driven energy shock rippled through local commodity prices faster than economic managers had anticipated.

In October, headline inflation accelerated to a nearly four-year high of 7.8% as high energy prices drove up the cost of fuel, transport, and utilities. As of October, headline inflation averaged 5.6%.

“Restoring price stability and safeguarding households’ purchasing power are essential to rebuilding confidence and supporting a durable economic recovery,” the BSP said.

It vowed that monetary policy settings will hinge on restoring price stability needed for sustainable economic growth.

“The BSP will ensure that monetary policy settings remain appropriate and consistent with its mandate of promoting price stability conducive to sustainable economic growth,” it said.

The BSP likewise noted that it will consider developments in inflation and inflation expectations as well as economic activity as it shapes its upcoming monetary policy decisions.

Last month, the BSP raised its key policy rate by a larger-than-usual 50 basis points (bps) to a nearly two-year high of 5.5%, bringing its cumulative hikes to 125 bps since it first tightened in April. Its next rate-setting meeting is on Dec. 17.

The BSP said easing inflation, steadier inflation expectations, stronger business and consumer confidence, and renewed investment and employment growth would show that the economy is recovering.

“These would indicate that inflationary pressures are subsiding while economic activity is regaining momentum,” it added.

The BSP projects inflation to settle at 6.1% this year, 6% next year, and 3.3% in 2028.

El niño risks

Meanwhile, Moody’s Ratings noted that the Philippines is among the most vulnerable emerging market (EM) economies to El Niño-driven food price pressures given its position as a net food importer.

“We expect El Niño-related food-price pressures to be concentrated in a relatively small group of vulnerable sovereigns rather than across EMs as a whole given the current record-high, though unevenly distributed, global food reserves such as grains, wheat and rice,” the global credit rating agency said in a separate report on Thursday.

“Of particular sensitivity could be the large net food importers with thinner current reserves, such as the Philippines and Egypt,” it added.

Last month, the Philippine Atmospheric, Geophysical and Astronomical Services Administration said a strong to very strong El Niño is active in the Tropical Pacific. It is expected to peak before the year ends and last until the first quarter of 2027.

Still, Moody’s Ratings sees the Philippine economy growing by 3.3% this year, before hitting the government’s 5%-6% target until 2030 at 5.1% in 2027 and 5.5% in 2028. These are all unchanged from its August projections.

It also kept its inflation forecasts at 6% for 2026 and 2027, and 4.5% for 2028. — Katherine K. Chan, Reporter