BSP hike may ease inflation, but not growth woes
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Philippine inflationAnother interest rate hike by the Bangko Sentral ng Pilipinas (BSP) may address immediate inflationary concerns, but broader economic growth problems remain beyond the reach of monetary policy, Bank of the Philippine Islands Lead Economist Emilio Neri Jr. said.
Neri said in a commentary earlier this week said tighter monetary policy to address inflation would reinforce the need for the fiscal side to accelerate reforms.
“The binding constraint on Philippine growth is increasingly structural rather than cyclical, with governance challenges also weighing on economic activity, something monetary policy cannot remedy,” he said.
“A 25-bp hike would therefore be consistent with the Monetary Board prioritizing price stability while leaving the burden of addressing supply-side constraints where it belongs: with structural and fiscal policy.”
Another rate hike expected
The BSP’s Monetary Board will convene next Thursday, 27 August, with analysts including Neri expecting another rate hike amid persistent inflationary pressures stemming from the Middle East conflict.
The central bank has raised its key policy rate twice since Gulf tensions flared in March. Neri said significant domestic risks threaten an already weaker external outlook, with talks between the US and Iran collapsing and local pump prices threatening to breach P100 per liter.
“Near-term risks are concentrated in food and energy. Adverse weather remains a key concern, with habagat-driven monsoon rains and flooding raising the risk of further crop damage just as food supply conditions were beginning to stabilize,” he said.
“The approved NCR wage hike, once implemented, would add to domestic inflation pressures by raising labor costs, particularly in labor-intensive services. Beyond the direct impact on prices, potential second-round effects could make inflation more persistent as businesses pass higher labor costs through to consumers,” he added.
Inflation to breach 3% annual target
The BSP expects inflation to breach its 3 percent annual target over the next three years.
However, Neri said this further complicates the economic outlook, with gross domestic product growth slumping for four consecutive quarters since the onset of the “floodgate” scandal.
“Monetary policy can manage cyclical demand but cannot address constraints on potential output, leaving limited scope for lower rates to offset a predominantly supply-driven shock. Pausing to support growth could risk allowing inflation expectations to become less anchored without addressing the underlying supply constraints,” he said.
Rate hikes can help contain inflation but may weigh on economic growth by discouraging consumption and investment, with consumption accounting for the largest share of Philippine GDP.
Neri said reforms addressing the infrastructure scandal, along with agricultural and energy security initiatives, should be handled through fiscal policy alongside the BSP’s monetary response.
The more durable solution
“The more durable solution lies in advancing reforms across government, from infrastructure execution and agricultural productivity to energy security,” he said.
