August 28, 2022

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Elevated inflation, rising rates to drag growth, says Medalla

ELEVATED INFLATION and rising interest rates will drag Philippine economic growth this year, the central bank chief said.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla on Friday said inflation is “very high” this year, but the Philippines will likely be “less affected” than other countries.

“Nonetheless, it will affect the growth because if people are spending more money on transport, fuel, food, they will have less money for other things,” he said during the Development Budget Coordination Committee’s (DBCC) briefing for the House Committee on Appropriations on Friday.

The consumer price index quickened to 6.4% year on year in July, the fastest in nearly four years, amid the continued climb in global prices of fuel and other commodities. It exceeded the central bank’s 2-4% target band for a fourth straight month.

Inflation averaged 4.7% in the first seven months, still below the central bank’s 5.4% inflation forecast for this year.

“But there’s very little we can do about it since those prices are totally beyond our control. The question whether inflation will hurt us, the answer is yes,” Mr. Medalla said.

For the first half of 2022, the economy expanded by 7.8%, exceeding the government’s 6.5-7.5% full-year target.

Mr. Medalla noted the peso’s depreciation against the US dollar is also adding inflationary pressure. As of Aug. 26, the peso has weakened by P6.02 or 9.84% from its P51-per-dollar close on Dec. 31, 2021.

“There’s too much depreciation, that is bad on the inflation for the economy. And the central bank raises interest rates, of course that will also affect the economy,” Mr. Medalla said. “But as I already stated, not enough to prevent us from achieving what was stated in the budget.”

The Marcos administration last week submitted to Congress its proposed P5.268-trillion national budget for 2023.

Most of next year’s proposed budget will go to social services at P2.071 trillion (39.31%) and economic services at P1.528 trillion (29.01%). The rest of the proposed budget is allocated to general public services at P807.2 billion (15.32%); debt burden, including net lending, at P611 billion (11.59%); and defense at P250.7 billion (4.76%).

Economic managers are targeting 6.5-8% gross domestic product (GDP) growth in 2023.

IMPACT
“Inflation or higher prices would erode the purchasing power of the government’s national budget or curtail the power of government spending as an economic growth driver/pillar,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

Higher interest rates would also require a bigger budget for interest payments on borrowings incurred to finance the budget deficit, he added.

“Same goes with the private sector: Higher prices/inflation reduce the funds that would otherwise go for spending and investments by consumers (about 78% of the economy), by businesses and other institutions,” Mr. Ricafort said.

China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message that rising prices have impacted the purchasing power of ordinary Filipinos.

“BSP’s recent aggressive actions seem to have re-anchored inflationary expectations and have brought some stability to the peso. However, both higher inflation and higher interest rates affect economic growth prospects,” she said.

The Monetary Board has raised its benchmark policy rate by a total of 175 bps so far this year, bringing it to 3.75%.

“We think that inflation is still on its way to peak in the fourth quarter. Hence, we expect BSP to keep raising rates at a moderate pace of 25 bps in its meetings before ending with a terminal rate of 4.5%,” Ms. Velasquez added.

If inflation starts easing in the coming months, Mr. Ricafort said there would be a lesser need for the BSP’s aggressive tightening.

The next Monetary Board policy meeting is scheduled on Sept. 22. — Keisha B. Ta-asan