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Friday, March 29, 2024

Economy can absorb rate hike—BPI

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Bank of the Philippine Islands, the third-largest bank, said Friday the economy has enough capacity to absorb the Bangko Sentral ng Pilipinas’ 50-basis-point increase in benchmark interest rate to 3.75 percent on Thursday.

The adjustment was the fourth time the benchmark interest rate was raised this year to tame rising inflation and brought the total rate adjustment this year to 175 basis points. An interest rate hike may reduce demand for bank loans and slow the growth momentum, according to analysts.

The BSP kept the policy rate at a record low of 2 percent for the entire 2021 to support the economic rebound from the COVID-19 pandemic.

“Even with the 50bps hike, we believe the economy has enough capacity to absorb this,” BPI said in a report. It confirmed the growth might slow down a bit due to higher interest rates, but “it might be worse if inflation continues to rise.”

Oxford Economics, a London-based think tank, said another main concern for the BSP is the currency, which remains at a historically depressed level despite a recent small rally. The peso closed at 55.93 against the US dollar Friday, down from 55.89 on Thursday.

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“While the BSP has turned increasingly hawkish since the start of the year, the interest rate differential with the US remains narrow, putting continuous downward pressure on the peso. With the US Fed tightening more aggressively and the current account deficit remaining wide, we look for only a gradual appreciation of the peso after troughing this quarter,” Oxford Economics said.

“We are sticking to our call of another 25bp hike in Q4. While Q2 GDP outcome came in weaker than the consensus, the BSP move signaled the focus is still on inflation. That said, given the negative output gap and unstable recovery, we only see one more hike in this cycle. Upside risks to this call remain, especially if the peso continues to depreciate amid higher uncertainty or a wider interest rate differential,” it said.

BSP Governor and Monetary Board chairman Felipe Medalla confirmed that the latest baseline inflation forecasts shifted higher for 2022, with average inflation projected to breach the upper end of the 2 percent to 4 percent target range at 5.4 percent.

“While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects,” Medalla said.

He said the upside risks also continued to dominate the inflation outlook up to 2023 on the potential impact of higher global non-oil prices, continued shortage in domestic fish supply, sharp increase in the price of sugar and pending petitions for transport fare increases.

“At the same time, despite some moderation in economic activity in recent months, overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit,” Medalla said.

Medalla said the Monetary Board deemed the monetary action necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon.

He said the favorable growth outcome in the first half at 7.8 percent gave the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds.

The Monetary Board also continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, he said.

Latest data from the Philippine Statistics Authority showed that inflation in July hit a 45-month high of 6.4 percent, driven by faster increases in the prices of food, nonalcoholic beverages and higher transport fares.

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