Diokno, experts: Economy can take surprise rate hike

FINANCE Secretary Benjamin Diokno on Thursday said the “robust” Philippine economy will “absorb” the surprise 75 basis-point-hike in key interest rates pulled off by the Bangko Sentral ng Pilipinas (BSP) on Thursday to rein in the surge in consumer prices.

Diokno, a former BSP governor, even expressed confidence that the Philippine economy is still on track to grow within their downscaled target of 6.5 to 7.5 percent this year, adding that the revised target “has been set to be able to incorporate the various pace of monetary policy normalization by the BSP.”

“Remember [that] the economy was growing at that rate before the pandemic, when policy rate was at 4 percent. We estimate that the economy will be back to where it was before the pandemic by [the] middle of this year, or by the third quarter of 2022 at the latest. The BSP simply accelerated the normalization process,” Diokno told reporters in a message.

The BSP Monetary Board decided to raise the interest rate on the overnight repurchase facility by 75 basis points to 3.25 percent, effective Thursday, the same day it was announced. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2.75 percent and 3.75 percent, respectively.

Previously, the BSP had back-to-back 25-basis point hikes in May and June.

Last week, the Cabinet-level Development Budget Coordination Committee (DBCC) reduced its GDP growth target for the Philippine economy this year from a range of 7-8 percent to 6.5 to 7.5 percent following recent domestic trends and challenges from external developments.

Nonetheless, he said the safe reopening of the economy through loosened quarantine restrictions combined with the positive impact of the passage of the economic liberalization and fiscal reform bills support their growth outlook.

To help sustain the “strong growth momentum,” Diokno vowed that the national government will “continue to adopt a gradual and calibrated path of fiscal consolidation.”

Local economists interviewed by the BusinessMirror also see the BSP’s decision to raise interest rates as having little to no negative impact on the country’s economic growth.

Bank of the Philippine Islands (BPI) Lead Economist Emilio Neri Jr. said he doubts that the rate hike would significantly hurt the country’s economic growth.

Watch inflation

Despite the latest rate hike, Neri pointed out this is still lower by 75 basis points than the prepandemic policy rate of 4 percent.

“If you look at our economic history, The economy managed to grow rapidly [+6.4 percent on average] between 2010 and 2019 with an average policy rate of 3.8 percent. I don’t see why we should be significantly affected if it is raised to 4.0 percent or even 4.5 percent at one point. Its really inflation which we need to watch more closely,” he told the BusinessMirror in a Viber message.

“We think the economic slowdown will be driven largely by rapid inflation which is a damper to consumer spending,” he added.

Ateneo de Manila University John Gokongwei School of Management Dean Luis F. Dumlao said the likelihood of an economic slowdown following the rate hike is “minimal.”

Should interest rate hikes slow down the country’s GDP growth, Dumlao believes this would still be within the government’s target range.

“Even if so, the negative impact will be minimal by slightly slowing down credit financed consumption,”  he said.

“The raising of interest will not slow inflation, but it will contain inflation from accelerating further,” he added.

For his part, Unionbank of the Philippines Chief Economist Ruben Carlo Asuncion not see a slowdown in the country’s GDP growth prospects.

“One, rate hikes are essentially there to anchor expectations [inflation]. This off-cycle move by the BSP is meant to calm the market amidst the protracted market volatility brought about by many factors lately [especially with regard to the higher-than-expected US CPI inflation revealed last night],” he said.

Inflation in the US rose by 9.1 percent in June, the fastest pace since November 1981.

The Philippine Statistics Authority earlier reported that inflation in June this year hit 6.1 percent, the highest since October 2018 when inflation averaged 6.9 percent. Year-to-date inflation averaged 4.4 percent as of June.

However, Asuncion said they think BSP is not done yet as they see another policy rate hike of 25 basis points, with the interest rate settling at 3.5 percent this year.

Given the higher interest rates or borrowing costs, Asuncion said the government needs to be “more prudent and tread carefully so as not to undermine current gains toward full economic recovery.”

Image credits: Arden Paolo Alberto | Dreamstime.com

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