Analysts predict that increases in interest rates will have a greater effect on economic growth than on inflation.

FURTHER MONETARY POLICY

The recent tightening measures implemented by the Bangko Sentral ng Pilipinas (BSP) are expected to have a dampening effect on economic growth.than it will tame inflation, analysts said.   

COMING SOON

According to the Senior Economist of ING Bank N.V. Manila, Nicholas Antonio T. Mapa, market participants are conscious of the upcoming event.

increasing rates at this point will not effectively tackle supply-side issuesflation.

The BSP possesses monetary instruments and is therefore unable to counteract inflation caused by supply-side factors. In other words, the BSP does not have precise means of targeting specific issues.fl

The author mentioned that the government cannot directly control inflation and instead must slow down capital formation, which would then impact economic growth. This statement was made in a written message.

In an off

Last week, the Monetary Board increased the borrowing rate by 25 basis points (bps), which raised the benchmark interest rate to 6.5% – the highest it has been since May 2007. 

2020

The BSP has increased the interest rates by 450 basis points from May 2022 to 2020.fight stubborn inflation.

Mr. Mapa said the off cycle move refl

The BSP is worried about inflation for the upcoming year. They predict that it will average 5.8% in 2023, but will decrease to 3.5% in 2024 and 3.4% in 2025.

ff

He stated that we should address any remaining demand side pressures.

2nd quarter, the GDP grew by 4.3%

In the period of April to June, the Gross Domestic Product (GDP) of the Philippines increased by 4.3%, marking the lowest growth rate in two years. This growth rate was recorded for the second quarter of the year.fi

In the first portion, the increase in gross domestic product (GDP) averaged 5.3%, which is still lower than the government’s desired range of 6-7% for 2023.

fic

Senior economist Cid L. Terosa from the University of Asia and the Pacific. fi

According to C, further increases in interest rates will greatly affect the growth of the economy.

“Although current infl

“Increases in interest rates have been driven by factors on both the demand and supply sides. However, these rate hikes primarily impact demand rather than supply. As a result, they may have a greater effect on reducing economic activity rather than curbing inflationary pressures from the supply side,” he stated in an email.   

Earlier, Governor Eli M. Remolona, Jr. of the BSP stated that the forceful tightening has not had an impact on the country’s potential for growth, but recognized that the previously suppressed demand is diminishing.

The Secretary of the National Economic and Development Authority (NEDA), Arsenio M. Balisacan, has continuously urged against increasing interest rates, stating that it will have a lasting effect on the economy.

According to Robert Dan J. Roces, the Chief Economist of Security Bank Corp., any adjustments to monetary policy should be approached with caution, taking into consideration the impact on inflation and the current state of the economy.

fl

In a Viber message, he stated that if the factors affecting inflation are related to supply, such as increased costs for food and oil, then raising interest rates may not be the most effective solution as it does not directly address these problems.

“According to him, increasing rates could potentially hinder economic progress by decreasing both consumer spending and business investments. Although these hikes may have some influence on secondary effects and inflation predictions, their ability to impede economic growth should not be underestimated.”

flation

Mr. Roces pointed out that increasing rates are intended to assist in controlling inflation.fl

Increasing interest rates can have a negative effect on the economy by making it more expensive to borrow money. However, these rate hikes can be harmful if the economy is already in a vulnerable state.

According to him, Mr. Remolona’s stance of being more careful with rate increases suggests that the central bank is waiting for additional economic information before making any decisions. This indicates a strategy of observing and evaluating before taking action, rather than making immediate changes without justification.   

On Friday, Mr. Remolona indicated that there is a high likelihood that the BSP will not increase interest rates on November 16th. Instead, they will likely leave borrowing costs at their current level due to the anticipated decrease in October’s inflation.

“At the moment, it seems as though there is a tone of caution with BSP emphasizing the importance of data and a potential pause at the November meeting,” stated Mr. Mapa.

The upcoming Monetary Board meeting will take place after the October inflation data is released on November 7th and the third-quarter GDP data is released on November 9th.