BSP says growth remains on track

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said Wednesday, Sept. 7, that the Philippine economy is on a sustainable growth path despite rising interest rates and a depreciating peso, according to a report by Manila Bulletin.

Medalla, with the rest of the Marcos government’s economic team in an investors’ forum in Singapore, assured foreign investors that despite the country’s high inflation, the BSP has the monetary policy leeway and buffers to stabilize the exchange rate currently at P57 vis-à-vis the US dollar, and to manage the elevated inflation by next year.

Medalla said the BSP, like all central banks, are facing challenging times because US interest rates are “not just high but sure to get higher” and this will mean “possibly a weaker peso.”

“Key is to achieve predictable inflation without necessarily bringing down growth too much (and for BSP to) have monetary policy settings that are consistent with price stability,” he told foreign investors in Singapore.

So far, the BSP has raised the policy rate by 175 basis points (bps) to 3.75 percent to re-anchor inflation expectations. The Monetary Board has raised the benchmark rate four times since May 19. The market expects the BSP will again increase the key rate by at 50 bps on Sept. 22.

Medalla has signalled that they will not stop at 175 bps, given there are still three BSP policy meetings for the year.

“You cannot say it’s the end of it because the US keeps doing 75s. We cannot not react. Fortunately, despite of all this very difficult environment, we have one thing going for us. We’re looking at scenarios where there will be no more lockdowns. So, the management of Covid will have a very strong demand for the simple reason that there’s quite a bit of pent-up demand in 2020 and 2021. The layman’s term for pent-up demand is revenge spending. This is what will enable us to grow very fast in spite of tightening monetary policy condition,” he said. The government’s 2022 GDP target is 6.5 percent to 7.5 percent. The GDP grew by 7.4 percent in the second quarter, slower compared to 8.2 percent in the first quarter this year.

Despite the large increases in the policy rate, in real terms, Medalla said the interest rates are are still quite low. As for inflation, a significant portion is imported inflation. “Because of what’s going on in outside of the Philippines, inflation is very high,” he said.

Still, Medalla said a 3.75 percent benchmark rate against a BSP average inflation forecast of 5.4 percent for 2022, is “quite cheap”.

“In short, monetary policy has much room and whatever happens, we have the capacity to make sure that we will have target-consistent inflation path. It’s high now but it will be low later. Our forecast is that it will be closer to three percent than four percent in 2024. It’s high now but going in that direction. There are forces that are working in our favor. If the US monetary policy becomes too restrictive, demand will fall, and the things we import, will fall. Right now, two-thirds of our current account deficit (is due to) high prices of things we import,” he explained.

“On balance, we’re confident we have enough room, the economy is strong enough, the banking system is strong enough, and the payment system is also improving very fast,” Medalla added.

The BSP expects inflation to remain above the two percent to four percent target this year and will only fall below four percent in the second half of 2023. Its recent policy actions are intended to bring inflation and inflation expectations back to the target to ensure the balanced and sustainable growth of the economy in the medium term.

Medalla has said that inflation will likely peak in September or October this year. With a 6.3 percent inflation in August, the year-to-date currently is at 4.9 percent average inflation.