IMF: Calibrate policy mix to sustain recovery

MANILA, Philippines — The Philippines needs to calibrate its policy mix to put the country’s economic recovery on a firmer footing, according to the International Monetary Fund (IMF).

After concluding its 2022 Article IV consultation discussions last September, the executive directors of the IMF said sustaining the economic recovery would require a focus on policies to address inflationary risks, increase fiscal and financial resilience to adverse shocks, and successful implementation of reforms to mitigate the COVID-19 pandemic scarring and raise productivity growth.

“Calibrating the policy mix to preserve macroeconomic stability, enhancing fiscal and financial resilience, and accelerating structural reforms are critical to sustain the recovery. Monetary and fiscal policies are aligned in the right direction to support external and domestic balance,” the multilateral lender said.

The Bangko Sentral ng Pilipinas (BSP) has raised key policy rates by 300 basis points, bringing the overnight reverse repurchase rate to a 14-year high of five percent from an all-time low of two percent to tame inflation and stabilize the peso.

Inflation averaged 5.4 percent in the first 10 months of the year, well above the BSP’s two to four percent target, after accelerating to a 14-year high of 7.7 percent in October from 6.9 percent in September.

The central bank’s Monetary Board is widely expected to further raise interest rates in its last rate-setting meeting this year scheduled on Dec. 15.

“A tightened policy stance will keep inflation expectations anchored and help alleviate pressure on capital outflows and the exchange rate. Exchange rate flexibility remains important as a shock absorber against the backdrop of persistent terms of trade shock and a wider current account deficit,” the IMF said.

On the other hand, the peso has bounced back strongly to the 56 to a dollar handle after slumping to an all-time low of 59 to $1 last October, after the BSP vowed to match the aggressive rate hikes delivered by the US Federal point by point to maintain a 100-basis-point differential.

“Policies will have to remain nimble, carefully balancing growth and price stability objectives, while managing limited fiscal buffers, preserving financial stability, and ensuring external sustainability,” the IMF said.

According to the IMF, the BSP’s prompt action to fight inflation is welcome, but further monetary tightening may be needed to keep inflation expectations well anchored.

“The current policy stance remains accommodative, and BSP should aim at bringing the policy rate close to the neutral real rate to securely bring inflation within the target range,” the IMF said.

Should inflation pressures continue to rise, the IMF said the BSP should respond with a tighter policy stance.

On the other hand, the IMF said monetary policy tightening would need to be recalibrated if inflation proves less persistent or if significant downside risks to growth materialize,

It pointed out that clear communication about inflation and the BSP’s policy intentions could help reduce uncertainty and improve policy transmission.

The country’s gross domestic product (GDP) growth picked up to 7.6 percent in the third quarter from 7.5 percent in the second quarter, bringing the average expansion to 7.7 percent from January to September, faster than the 6.5 to 7.5 percent target set by the government.

The IMF expects the country’s growth to accelerate to 6.5 percent this year before slowing down to five percent next year as the outlook for 2023 is more challenging due to unsettled conditions in major advanced economies.

“Medium-term economic growth is forecast at about 6.3 percent. Inflation is expected to rise to 5.3 percent in 2022, then to decline modestly in 2023, supported by a moderation in commodity prices, and converge to the mid?point of the band in 2024, as tighter monetary policy keeps inflation expectations anchored,” the IMF said.

IMF warned that higher downside risks to growth and rising interest rates warrant close monitoring of financial stability risks.

Despite some improvement in profitability and debt servicing capacity, the pandemic has increased risks in non-financial corporations, which may face renewed challenges with rising interest rates.