‘Further rate hikes may hurt economy’

Philippine Tribune
Philippine Tribune

Louella Desiderio – The Philippine Star

October 7, 2023 | 12:00am

The latest inflation print is at the upper end of the BSP’s 5.3 to 6.1 percent inflation forecast for September, and is higher than the 5.3 percent inflation reading in August.

Philstar.com / Jovannie Lambayan

MANILA, Philippines — The National Economic and Development Authority (NEDA) has warned against further raising interest rates, saying such action could hurt the economy amid high inflation.

“If I were in the Monetary Board, I would say no (to rate hikes). We have been most aggressive in our region in raising interest rates,” NEDA Secretary Arsenio Balisacan said in a press conference yesterday.

Last Thursday, the Bangko Sentral ng Pilipinas (BSP) said it was ready to resume monetary policy tightening as it expects inflation to remain elevated in the coming months after headline inflation rose for a second straight month to 6.1 percent in September.

The latest inflation print is at the upper end of the BSP’s 5.3 to 6.1 percent inflation forecast for September, and is higher than the 5.3 percent inflation reading in August.

Inflation averaged 6.6 percent from January to September.

While the central bank kept key interest rates steady for a fourth straight meeting last month, BSP Governor Eli Remolona Jr. has hinted of a possible rate hike in November.

Balisacan said raising interest rates would hurt the economy, consumers and producers, and will have long-term effects, with the impact of the higher rate to be felt even in the coming quarters.

While he believes the economy can handle further rate hikes, he said it is unnecessary.

“I look at how our neighbors, how we have been using our monetary policy tools to address inflation or other concerns. We see that our policy rates, we stand out…and that is not something we can be proud of because that is increasing the cost of production, that is depressing consumer demand, so domestic demand is going to be affected. And the impact is more longer term,” Balisacan said.

He said the source of inflation is the supply side and not the demand side that requires a monetary solution.

The NEDA is also concerned about the impact of higher interest rates on the exchange rate.

“A relatively weak peso will make your economy stronger because you make your exports more competitive and you will also make your import substituting local industries more competitive,” Balisacan said.

While the government is concerned about high inflation and its impact on growth, he believes the lower end of the six to seven percent economic growth target for the year is still achievable.

“Even if it (economic growth) is slightly below six (percent), it is not something that we have to cry about because that still makes us one of the best performing economies in the region,” he said.

The country posted slower growth of 4.3 percent in the second quarter from 6.4 percent in the previous quarter, and 7.5 percent in the second quarter last year due to elevated prices and interest rates that dampened consumption, as well as the contraction in government spending.

In the first semester, the country’s economic growth was at 5.3 percent.

Balisacan said the government expects the underspending issue would be addressed in the third quarter.

“And of course, the Christmas season is around the corner. That also generates a lot of extra push, and we are also seeing that remittances will remain quite stable,” he said.

On inflation, he said economic managers want the country to achieve as fast as possible the target of two to four percent, even as he admitted getting to the higher end of the target band would be a challenge.

While high inflation can impact negatively on the government’s poverty reduction objectives, Balisacan said he is hopeful the goal of bringing down the poverty rate to nine percent by 2028 can still be reached.

The country’s poverty incidence was at 18.1 percent in 2021.

“We must focus on generating high quality jobs,” Balisacan said.

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