MANILA, Philippines — Despite raising interest rates, economic managers see no need to revise growth targets in the medium term as the domestic economy is expected to remain resilient to further policy tightening.
The Bangko Sentral ng Pilipinas has raised policy rates by a cumulative 100 basis points this year in a bid to curb inflationary pressures.
Inflation leapt to a fresh five-year high of 5.7 percent high in July, bringing the average inflation rate in the first seven months to 4.5 percent and adding concerns inflation would spike above six percent to peak within this quarter.
Finance Secretary Carlos Dominguez III said while the successive rate hikes would affect growth prospects, the dent would not be substantial.
“We believe the policy rates are appropriate at this time. They are data-driven. And while this may have an affect on the growth rate, we don’t think it’s going to be that serious because the country is really growing at a fast pace. It may affect a bit but I don’t think it would be significant,” he said during the economic forum of the Economic Journalists Association of the Philippines in Manila yesterday.
“So the target remains for now,” he added.
Rising policy rates make it more expensive to borrow money, potentially discouraging consumption and investments.
In July, the inter-agency Development Budget Coordination Committee (DBCC) revised several economic assumptions for this year and the next to reflect the government’s aggressive spending strategy and the upward trend in consumer prices.
Despite the change in some of the macroeconomic forecasts, however, economic managers still maintained the country’s economic growth target of seven to eight percent in the medium term.
BSP Governor Nestor Espenilla, Jr. said that while the country is now in the grips of a “transitory supply shock,” the economy is growing fast enough to weather stronger policy response that may be needed in the future.
“Sustained domestic growth also suggests that the economy can accommodate monetary policy tightening,” Espenilla said. “This growth is broad-based.”
Espenilla reiterated earlier pronouncements that domestic inflation is stoked by issues on the supply side of the economy, on which monetary tools have no direct effect except for the prevention of the so-called second round effects.
He said curbing the fast growth of consumer prices requires coordinated efforts of agencies that can respond to the supply side of the economy.
He noted, however, that based on the month-on-month growth rate, the inflation momentum is slowing down.
“This shows the impact of excise tax adjustments is transitory,” Espenilla said.
BSP still expects inflation growth to peak in the third quarter of the year and gradually ease to two to four percent next year “as supply shocks dissipate.”
Espenilla said for now, risks to the inflation outlook remain tilted to the upside because of additional wage adjustments, pending petitions for transport and power rate hikes, faster-then-expected monetary policy normalization in advance economies, and the proposed increase in the palay buying price of the National Food Authority.
He said BSP’s monetary response would continue to be guided by developments in the inflation environment.
Economic growth slowed down in the second quarter of the year to six percent amid a high inflation environment and the implementation of several measures intended to spur sustainable development in several areas.
Growth in the second quarter was slower than the revised growth figure of 6.6 percent in the first quarter of 2018 and 6.6 percent in the second quarter of 2017.
Despite slowing down in the second quarter, the Philippine economy is still among the best performing economies in Asia, following Vietnam and China which registered growth rates of 6.8 percent and 6.7 percent in the second quarter of the year, respectively.
This puts the average GDP growth in the first six months of the year to 6.3 percent, implying the economy would have to expand by at least 7.7 percent in the second semester to reach the low end of the seven to eight percent growth target for 2018.