Lagged impact of high rates to take toll on economy – BSP

MANILA, Philippines — The lagged effects of monetary policy adjustments last year will continue to take its toll on the economy, with growth likely to fall below government targets anew.

Based on its latest Monetary Policy Report, the Bangko Sentral ng Pilipinas (BSP) expects the economy to remain intact over the medium term but could operate slightly below its potential.

The BSP said gross domestic product (GDP) growth could settle below the Cabinet-level Development Budget Coordination Committee’s target of 6.5 to 7.5 percent for this year and even until 2025.

“The projected GDP 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 said.

It should be noted that while the 5.6 percent GDP growth in 2023 outpaced major Asian economies and market expectations, it was below the six percent target of the government.

The central bank added that the output gap is estimated to be slightly negative in 2024 and 2025 as the impact of previous policy interest rate adjustments takes hold on the economy.

The BSP has so far lifted its key policy rates by an aggregate of 450 basis points to settle at a 16-year high of 6.5 percent.

“A projected slowdown in global growth owing in part to tight monetary conditions across countries could likewise dampen aggregate demand,” the BSP said.

On the other hand, the BSP maintained that the output gap could still be supported by higher consumption due to higher wages and the increased value of remittances amid a peso depreciation.

Potential output is likewise expected to be sustained by improvements in the labor market conditions and continued investment growth.

“Productivity growth is also seen to continue owing largely to generally robust economic activity and robust infrastructure spending,” the BSP said.

The BSP estimates that the impact of its policy rate adjustments will likely peak this year.

Still, the central bank emphasized that growth in the medium term could be supported by structural reform measures that could enhance the investment climate as well as economic sentiment in the country.