Delays in interest rate cuts appear to be slowing growth

By means of Luisa Maria Jacinta C. Jocson, News reporter

HIGHER interest rates for longer will keep inflation at bay, but at the cost of slower economic growth, analysts say.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. indicated earlier this week that the central bank could postpone interest rate cuts due to lingering inflation risks.

“Mr Remolona’s recent statements suggest a cautious approach to monetary policy adjustments. If the rate cuts are smaller and delayed, it could mean the central bank is prioritizing controlling inflation over boosting growth,” said Robert Dan J. Roces, chief economist at Security Bank Corp. in a Viber message.

“A delay in interest rate cuts could slow economic growth in the short term as higher borrowing costs could persist and investment and consumer spending could decline,” he added.

Mr Remolona said this week that the “central scenario” would be for interest rates to be cut in the fourth quarter, but that this could be postponed until the autumn. Ffirst quarter of 2025 if receivedFlation worsens.

The rate cuts will also not be “huge” and will likely bring the policy rate to around 6%, he said.

The central bank held firm for a fourth straight meeting in April, keeping its benchmark interest rate at a nearly 17-year high of 6.5%.

From May 2022 to October 2023, the Monetary Board increased borrowing costs by 450 basis points (bps).

Mr Remolona had said current interest rates were already tight and were “doing all the work”.

“Comments from Governor ReaffDespite the fact that the current policy stance is restrictive and capable of slowing economic activity in an effort to ward off demand-side pressures,” said Nicholas Antonio T. Mapa, senior economist at ING Bank NV Manila, in an e-mail mail.

“This runs counter to some claims that the current monetary policy stance is normal. When policy rates are in restrictive territory, they go to work by slowing the economy, which in turn can lead to slower inflation as demand falls,” he added.

The economy grew by a weaker-than-expected 5.5% in 2023, falling short of the government’s target of 6-7%.

Economic managers recently cut the gross domestic product (GDP) growth target to 6-7% this year from 6.5-7.5% earlier this year, taking into account persistent inflation and a looming global slowdown.

First quarter GDP data is expected to be released on May 9.

“If the BSP believes the current rate achieves its targets, any easing within the year could be minimal. The degree of easing would likely depend on a range of factors, including inflation trends, economic growth data and external economic conditions,” Roces said.

Inflation accelerated to 3.7% in March, the second month in a row that it accelerated on a monthly basis.

The BSP previously said inflation could temporarily accelerate above the target range of 2-4% over the next two quarters as upside risks remain.

The central bank predicts an average inflation rate of 3.8% this year.

Mr. Roces said the BSP is also focused on maintaining price stability through the foreign exchange market, which “could help anchor inflation expectations and prevent an inflationary spiral.”

The peso reached the P57 level for the first time in almost 17 months earlier this week.

The local unit continued to depreciate for the sixth day in a row, closing at P57.19 against the dollar on Thursday. This was a centavo weaker compared to Wednesday’s finish of P57.18.

Meanwhile, Bank of the Philippine Islands chief economist Emilio S. Neri, Jr. said there would be no “meaningful impact” on GDP growth if the BSP continues to keep its policy rate unchanged.

Election spending and lower inflation compared to the past two years would still support demand this year, he said.

“The risk of a drag on growth could come more from global headwinds that could force BSP to raise even further. But that is still a low probability event and not our central scenario,” he added.

Mr Remolona said the Monetary Council will only consider raising rates if inflation expectations are no longer anchored. “If we see that markets and households are starting to believe that inflation will rise, then we should consider a rate hike,” he said.

The BSP last adjusted rates in October, when it implemented an off-cycle rate hike of 25 basis points.

“The governor is right when he says that 6.5% (policy rate) is already doing its job and that further tightening may only be necessary if headline inflation starts to rise to the 6% level, which is still highly unlikely at this point is,” said Mr Neri. .

“Moreover, Mr. Remolona’s indication that he is not in favor of further rate increases simply indicates that rate increases have a negative impact on growth and that further rate increases would further damage growth,” Mr. Mapa added.