Diokno: Economy can absorb sudden interest rate increase

MANILA, Philippines — The Philippine economy is in good standing, enough to weather the massive surprise rate hike by the central bank and still grow within the target this year even amid inflationary concerns, according to Finance Secretary Benjamin Diokno.

Diokno said the economy is robust enough to absorb the 75-basis-point increase in policy rate by the Bangko Sentral ng Pilipinas (BSP) as part of measures to address elevated inflation and the peso’s continued depreciation.

He noted that the expansion of economic activities in the country remained favorable. The gross domestic product (GDP) grew stronger than expected in the first quarter and a positive second quarter is already in the picture.

The finance chief noted that the 6.5 to 7.5 percent GDP growth target for 2022 remains within reach even with the sudden rate adjustment.

“The DBCC (Development Budget Coordination Committee) target range for the GDP growth rate has been set to be able to incorporate the various paces of monetary policy normalization by the BSP,” Diokno told reporters yesterday.

The latest interest rate increase comes after the back-to-back hikes in May and June, bringing the policy rate back to its March 2020 level of 3.25 percent.

The Monetary Board is not due to meet until Aug. 18 when a 50-basis-point rate hike is expected to be delivered.

“The growth outlook is seen to be supported by the maintenance of loosened quarantine restrictions as well as the positive impact of structural reforms,” he said.

Among these reforms are the Corporate Recovery and Tax Incentives for Enterprises Act, Financial Institutions Strategic Transfer Act, Public Service Act, Rice Tariffication Law and the Foreign Investments Act.

Diokno argued that the economy was growing at the same rate before the pandemic when the policy rate was at four percent.

He estimates that the economy will be back to its pre-COVID level by the middle or the third quarter of 2022 at the latest.

“The BSP simply accelerated the normalization process,” Diokno said.

He emphasized that the national government would continue to adopt a gradual and calibrated path of fiscal consolidation to help preserve the  strong growth momentum.

Diokno has yet to fully provide a fiscal consolidation plan except for a few tax measures including those on online transactions and on single-use plastic.

A fiscal consolidation plan, which is supposed to cover higher or additional taxes, is necessary to pay off debts that piled up due to the pandemic. It also aims to reduce the share of national debt to the country’s output and not put the Philippines’ credit rating at risk.

But Diokno maintained that debt-to-GDP ratio is not the sole criterion that matters as economic fundamentals of the country should also be considered.

With this, Diokno said the Philippines continues to fare well as fiscal and monetary authorities are in control.

“The debt-to-GDP ratio is manageable. The banking system is sound and more than adequately capitalized. The banking industry has built enough buffers. Our external sector remains robust: gross international reserves are more than enough and there is a steady structural inflow of foreign exchange,” Diokno said.