BSP must keep policy ‘tighter than before’ — HSBC

THE BANGKO SENTRAL NG Pilipinas (BSP) may have to keep interest rates high for longer or raise them even further to cool downFsays HSBC.

This is because private consumption remains strong and spending patterns are changing as the Philippines moves closer to becoming an upper-middle-income economy.

In a report, HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay says said the reins on monetary policy may need to be “tighter than before” to keep inflation within the target range of 2-4%.

“As Filipino consumers change, inflation and monetary policy must also change. We can expect the consumer price index (CPI) to be more stable as consumers become wealthier and spend more of their budget on services and less on basic products,” he said.

“Policymakers would then need to tighten monetary reins even further if inflation were to rise in the future, which supports our view that, when the dust settles, monetary policy in the Philippines is likely to be higher for even longer,” he added .

The Monetary Board earlier this month maintained its benchmark interest rate at a 17-year high of 6.5% Fif it is a direct meeting.

BSP Governor Eli M. Remolona, ​​Jr. previously said it was “highly unlikely” the central bank would implement further rate hikes. Instead, he signaled the possibility of a rate cut as early as August.

While high inFInflation and interest rates have dampened household consumption, HSBC says the Philippines remains “one of the strongest in ASEAN.”

“But interestingly, as household budgets tighten, consumers are reallocating their spending from ‘essentials’ – such as food and clothing – to restaurants and other miscellaneous goods services, even as prices have risen. It’s a bit of a paradox,” Mr Dacanay said.

Despite a “squeeze in purchasing power,” HSBC says Filipino consumers are spending more on non-essential products such as skin care, sports and takeaway food.

“This is proof that tastes and preferences are changing, especially now that the Philippines is inches away from becoming an ‘upper-middle-income economy’.”

The government aims to achieve upper middle-income status by 2025. An upper-middle-income country has a gross national income (GNI) per capita between $4,466 and $13,845.

Currently, the Philippines is classified as a lower-middle-income country, with a GNI per capita of $3,950.

“All things considered, the slowdown in household consumption is likely temporary as Filipino households adjust their spending given high inflation last year,” HSBC said.

Household spending, which accounts for more than three-quarters of economic growth, rose 4.6% in the first quarter, the slowest since 2010.

“When inflation stabilizes, consumption should generally pick up. But if it does, demand for non-essential goods is likely to grow faster than essential goods – a trend suited to a country that is inches away from becoming an upper-middle-income economy,” the report said .

Headline inflation accelerated for the third month in a row in April to 3.8%, bringing the four-month inflation average to 3.4%. The BSP expects full-year inflation to be 3.5%. — Luisa Maria Jacinta C. Jocson