The Bangko Sentral ng Pilipinas (BSP) forecasts strong economic growth in the first half of 2024, followed by a potential slowdown in the second half due to the impact of higher interest rates on demand.
BSP staff estimates, presented during the April 8 Monetary Board meeting, indicate continued domestic growth prospects for 2024 and 2025.
“Gross domestic product [GDP] growth is projected to remain robust in the first half of 2024, decelerate in the second half due to positive real interest rates following the BSP’s tightening cycle, and subsequently pick up in 2025,” the Monetary Board said in a statement.
The outlook aligns with an expected shift towards a slightly negative output gap in 2024-2025, suggesting sustained economic growth momentum and a low likelihood of a sharp economic decline. The government is looking at a GDP growth range of 6 percent and 7 percent, following a revised 5.5-percent expansion in 2023.
Meanwhile, the BSP attributed the recent depreciation of the Philippine peso against the U.S. dollar primarily to the general strength of the greenback. The peso closed at 57.22 against the greenback Monday.
“The peso weakened due to broad US dollar strength following the release of positive key U.S. economic indicators, dampening market expectations of a policy easing by the U.S. Federal Reserve in June,” the BSP explained.
Inflationary pressures are forecast to remain elevated over the policy horizon due to potential factors such as increased transportation costs, supply constraints on food commodities, rising electricity rates, higher global oil prices, and potential minimum wage hikes.
“The latest risk-adjusted inflation forecast is estimated at 4.0 percent in 2024 and 3.5 percent in 2025,” the BSP said. “These figures are higher than previous forecasts due to upward revisions in the baseline projections. The increased projections also correspond to a higher probability of inflation exceeding the target range of 2 to 4 percent in 2024, with a likelihood of 56.5 percent compared to 51.0 percent in the previous forecast.”
The Monetary Board opted to maintain the overnight borrowing rate at 6.50 percent during its April 8 meeting. Current interest rates on the overnight deposit facility and overnight lending facility also remain unchanged at 6.00 percent and 7.00 percent, respectively.
The decision reflects the projected inflation path, which is expected to stay within the target range despite being slightly higher than previously anticipated. Inflation expectations also remain generally well-anchored, although upside risks persist.
Oil price developments contribute to these inflationary risks, as Dubai crude oil spot prices have increased due to factors including OPEC+ supply cuts, geopolitical tensions, and market expectations of interest rate cuts by the U.S. Federal Reserve.
Bank lending activity continues to exhibit single-digit growth, reflecting the impact of the BSP’s tight monetary policy stance. Fiscal developments indicate a narrower national government deficit in 2023 compared to 2022, while prospects for global economic growth have improved with receding downside risks.
“The Monetary Board’s decision to maintain monetary policy settings was based on a comprehensive assessment of the inflation outlook, domestic growth prospects, supply-side pressures, oil price developments, financial market conditions, and fiscal developments,” the BSP said. “These factors collectively point to the need for a cautious approach to monetary policy.”