Rate cuts seen boosting economy’s “missing link”

How fast will cutting rates stimulate economic growth? It’s not that straightforward, according to Nicky Mapa, Metrobank’s chief economist, who recently spoke to the bank’s clients at an economic briefing titled: “Rate cuts are here, now what?”

He said the country faces some hurdles.

Household consumption has eased following a post-pandemic lockdown spending spree. Yet the economy could get a fresh boost from businesses investing on capital goods, as the Bangko Sentral ng Pilipinas reduces borrowing costs.

“There’s only one sector in the economy that has yet to revert to pre-COVID levels. And what’s that? That’s capital formation,” Mapa said, describing it as a “missing link” to a still robust economy.

Private-sector investment is PHP 649 billion lower than pre-pandemic levels. Consumption is higher in 2023 compared to 2019 when the pandemic struck. Government spending, too, has surged in the same period.

By lowering policy interest rates, the BSP hopes to encourage businesses to invest in capital goods, infrastructure, and other long-term assets that can sustainably fuel economic growth.

Mapa said that has become much more important, since the government may look to spend modestly amid fiscal consolidation efforts – with the debt-to-GDP ratio having risen significantly due to pandemic-related expenditure.

The complex interaction of monetary policy, capital formation, and consumption is something that investors will watch closely.

Is it time to jump into more risk assets such as stocks and real estate? The coming months will tell us whether that is a prudent move or not.

Know more about Nicky Mapa’s insights and analysis in the video of the economic briefing here.

(If you are a Metrobank client, please reach out to your relationship manager or investment specialist for a deeper discussion about your investment portfolio. Not a client yet? You may sign up here.)

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has won various communication awards for his work in helping companies and individuals communicate with purpose, clarity, and creativity. He also has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.