The Bangko Sentral ng Pilipinas expects the economy to perform slightly below its optimum level as interest rates restrain demand for goods and services.

“The economy is projected to operate slightly below its potential. The output gap is estimated to be broadly neutral in the fourth quarter of 2023, and will turn slightly negative over the rest of the policy horizon,” the BSP Monetary Policy Report for this month says.

A negative output gap indicates lack of demand for goods and services, resulting in below-maximum operation levels of industries. The output gap is calculated using the country’s actual and possible highest gross domestic product or GDP.

The BSP report does not specify a figure for its GDP projection, but the Development Budget Coordination Committee initially expects economic growth to reach 6.5 to 7.5 percent this year.

However, the BSP report says the central bank will likely see the peak of its policy rate adjustments this year as it ensures favorable economic growth under the government’s medium-term plan and normal economic conditions.

“Domestic economic activity is seen to remain intact over the medium term.”

Growth path

“The projected growth path is supported by the improved global growth outlook and decline in global crude oil prices, tempered in part by the lagged impact of the policy rate adjustments,” the BSP says.

“While the projected impact of the BSP’s policy rate adjustments is likely to peak in 2024, growth in the medium term could also be supported by structural reform measures that could enhance investment climate as well as economic sentiment in the country,” it adds.

The BSP announced this week a steady policy rate at 6.5 percent due to the recent inflation downtrend to 2.8 percent in January from 6.1 percent last September, along with the peso appreciation.

However, the BSP says food prices might remain relatively sticky as El Niño threatens to reduce food supplies.

On the demand side, the BSP says petitions for higher minimum wages for workers outside Metro Manila might lead to faster inflation due to aggressive consumption of goods and services.

Policy settings unchanged

“In consideration of prevailing risks, the BSP deems it appropriate to keep monetary policy settings unchanged in the near term even as inflation conditions continue to improve,” the central bank says.

In its meeting this month, the BSP eased its baseline inflation forecast to 3.6 percent for this year from 3.7 percent during its meeting last November. Meanwhile, the BSP kept its 2025 projection at 3.2 percent.

The BSP targets inflation to settle within 2 to 4 percent to achieve better economic growth.