Interest rate hike can hurt economy — NEDA

A monetary response is not necessary to combat supply-side-driven inflation in the Philippines, National Economic and Development Authority Secretary Arsenio Balisacan said on Wednesday.

In an interview on the sidelines of the 2023 Arangkada Forum in Pasay City, Balisacan told reporters that prices of goods like rice and the cost of services increase when supply cannot meet growing demand.

"I think that the source of inflation is the supply side and not the demand side that requires a monetary policy cure," Balisacan said. He had noted earlier this month that additional increases in interest rates "can hurt" the economy and consumers.

He warned that further monetary hikes might adversely affect consumers and manufacturers as they could lead to higher production costs, reduce consumer demand, and, consequently, negatively impact the economy in the long run.

Balisacan said raising borrowing costs is still "unnecessary," even if the Philippine economy can still manage more interest rate hikes.

"There's really no urgency to create another round of high-interest rates," he said in a briefing this month. "Higher interest rates will really put us too far away from our peers in the region," he added.

Net importer

As the government works to remedy underspending, Balisacan expressed optimism for improved inflation data in the coming months and said third-quarter economic growth would be better than a year earlier.

Before its regular rate-setting meeting on 16 November, the BSP is considering raising its benchmark rate outside of its normal cycle on Thursday to stabilize inflation expectations.

As a net rice importer (the country produces less rice than its people consume), the Philippines has faced supply-side challenges in the last two years, including during the Covid-19 pandemic which disrupted agricultural production and supply chains.

Likewise, the Russia-Ukraine war, which has led to higher fertilizer and fuel prices, is making it more expensive to produce rice. At the same time, climate change — leading to extremes like droughts and floods — affects agricultural production.

Economists have explained that when input costs for rice production increase, farmers may pass on these costs to consumers in the form of higher prices, thereby contributing to inflation.

In the Philippines, the recent increase in rice prices has been a major contributor to inflation.

According to the Philippine Statistics Authority, inflation in the Philippines reached 6.1 percent in September 2023, the highest level in four years. Rice prices, on the other hand, increased by 17.9 percent year-on-year in September, the fastest pace of increase in 14 years.