By Cai Ordinario, November 4, 2020; Business Mirror
THE decision of the Bangko Sentral ng Pilipinas (BSP) to hike interest rates due to the recent policy action of the US Federal Reserve may temper the country’s growth prospects, according to the National Economic and Development Authority (Neda) and local economists.
On Thursday, BSP Governor Felipe M. Medalla said in light of the 75 basis points (bps) increase in US interest rates, the Monetary Board will match the policy action of the US Federal Reserve in its upcoming policy rate setting on November 17. (Full story: https://businessmirror.com.ph/2022/11/03/bsp-to-increase-interest-rates-by-75bps/)
Socioeconomic Planning Secretary Arsenio M. Balisacan told the BusinessMirror that this BSP action is necessary because not responding to the rate hike of the US Federal Reserve would prove to be even more detrimental to the Philippine economy.
“We have no choice but to adjust our policy tools in response to external developments. While there are downside implications of these adjustments to our near-term growth prospects, failing to adjust when the changing conditions require such adjustments will cost our economy more and compromise growth in the longer term,” Balisacan told this newspaper.
Local economists and analysts also supported the move of the BSP. Ateneo de Manila University John Gokongwei School of Management Dean Luis F. Dumlao said the impact on the economy of the policy rate hike would be minimal.
Dumlao said the country’s growth rate will remain above 6 percent, maintaining its position as one of the fastest-growing emerging economies. He expressed confidence that higher interest rates will also have a minimal impact on spending as car sales have increased.
“The purpose [of the rate hike] is to combat inflation brought about by possible dollar appreciation brought about by decrease in the interest premium between US and Philippine interest rates,” Dumlao told the BusinessMirror.
Bank of the Philippine Islands lead economist Emilio S. Neri Jr. also welcomed Governor Medalla’s statement, saying such will also supplement the BSP’s foreign exchange market interventions.
Neri said, however, that making this statement two weeks ahead of its policy rate setting does not mean the Monetary Board would be kept from raising interest rates beyond 75 basis points, especially “if markets become more volatile than expected.”
The BPI economist said raising interest rates will not stymie the country’s economic growth but may affect “financial markets, overleveraged corporates, and government debt dynamics.”
“If the Marcos Jr. administration is able to carry out meaningful reforms to boost investor confidence, I don’t see why slightly higher interest rates can stymie the Philippine economy’s growth recovery. It’s premature to worry about higher policy settings until the policy rate starts to approach the economy’s nominal GDP growth rate,” Neri, however, said.
Meanwhile, Unionbank Chief Economist Ruben Carlo O. Asuncion said the announcement of Governor Medalla was a “smart move” since it will prevent speculative behavior.
Unfortunately, Asuncion said, the country’s GDP growth will “bear the brunt” of the rate hikes this year. The announcement of Governor Medalla to raise interest rates in its next policy meeting will be the fourth rate hike implemented this year.
Nonetheless, the higher interest rates are not bound to lead to job losses. “We have initially penciled in 2023 GDP growth to settle at 5.7 percent. Below the prepandemic average growth, but still definitely respectable. With that potential growth, I do not think there will be job losses,” Asuncion said.
For his part, Managing Director of eManagement for Business and Marketing Services, Jonathan Ravelas said Medalla’s statement will preserve the “interest differential” which is a preferred since it “will keep the local currency range bound.”
Ravelas agreed with the other economists that growth this year may not hit the upper band of the government’s targets. But GDP growth will remain “ideal” versus the country’s peers in the region.
The primary concern right now, Ravelas stressed, is to combat inflation. This is key since prolonged levels of high inflation will affect consumption, which accounts for 70 percent of the Philippine economy.
“[It is] likely [the] next two meetings will deliver two 75 bps hikes,” Ravelas said. “BSP could also lower the bank’s open position to lessen the volatility in FX [foreign exchange] rates.”
Impact on lending
The higher policy rates which lead to an interest of 4.75 percent, Neri said, may not be enough to make lending more restrictive in the coming months.
Neri said most consumer-related credits have fixed rates and are not usually affected by rate hikes. The bigger danger is hitting a 14-year-high inflation that could erode consumer confidence and slow credit growth.
Earlier, salary-based consumer loans surged by more than half as of September. BSP data showed salary-based general purpose consumption loans jumped 56.8 percent to P117.391 billion as of September 2022 from P74.869 billion in the same period last year.
Asuncion said, however, that there could be an impact on bank lending. He expects lower demand for loans because of the higher interest rates.
“There is quite a lag effect as to these hikes. Hopefully, inflation could moderate in 1Q23 [first quarter of 2023]. But if commodity prices remain elevated it might be difficult,” Ravelas said.
Earlier, banks remained stringent when lending to micro, small and medium enterprises (MSMEs) as data from the BSP showed they considerably tightened their credit standards in the third quarter of the year. (Full story: https://businessmirror.com.ph/2022/11/01/bsp-pay-based-consumer-loans-surge-56-8-in-september/)
Based on the Senior Bank Loan Officers Survey (SLOS), some 10.4 percent of banks said they “tightened considerably” their credit standards for enterprises in the third quarter compared to 6.5 percent in the second quarter of 2022. (Full story: https://businessmirror.com.ph/2022/10/31/banks-remained-scrooges-when-lending-to-msmes/)