THE BANGKO SENTRAL ng Pilipinas (BSP) will likely remain hawkish, but weak economic growth could limit its space to curb rising prices via monetary tightening, China Banking Corp.’s (Chinabank) chief economist said.
In an interview on Money Talks with Cathy Yang on One News on Wednesday, Chinabank Chief Economist Domini S. Velasquez said the central bank has no room to be as aggressive in monetary policy tightening given the weak state of the economy.
“We think the BSP will be hawkish throughout the year as long as inflation remains elevated, and we don’t see signs of it returning back to within target,” she said.
“But I think given that we have 2.8% GDP (gross domestic product) growth, one of the slowest in the region, the BSP cannot hike the same way it did in the 2022-2023 hiking cycle. They don’t have that much room,” Ms. Velasquez added.
The central bank began its previous tightening cycle in May 2022 as soaring fuel prices following Russia’s invasion of Ukraine stoked inflation.
Inflation accelerated from 3% before the crisis to as much as 8.7% in January 2023.
During that cycle, the BSP hiked rates by a total of 450 basis points (bps), bringing the key policy rate to 6.5% by October 2023.
The Philippine economy grew by 7.6% in 2022 and 5.5% in 2023.
Now, the economy is grappling with a new wave of oil shocks compounded by the lingering effects of last year’s flood control corruption scandal. In the first quarter, GDP grew by 2.8% — the weakest pace since the pandemic.
Ms. Velasquez said that if the BSP were to tighten aggressively against this backdrop, the economy may soon fall into a recession.
“If you hike as much as you did before, you’ll see the economy going down or possibly entering into a recession,” she said. “They need to manage it in terms of hiking prudently but not hiking too much also.”
A recession refers to a significant decline in economic activity spread across the economy, often seen as two consecutive quarters of contraction.
Still, Ms. Velasquez noted that the BSP can deliver another 25-bp rate increase at its June 18 meeting as inflation is expected to remain elevated throughout the year.
If realized, this would mark the central bank’s second straight hike, following its 25-bp hike to 4.5% in April to temper inflationary pressures amid threats of broadening spillover effects and disanchoring inflation expectations.
Inflation has settled above the BSP’s 2%-4% target in the last three months but unexpectedly eased for the first time in six months to 6.8% in May from the over three-year high print of 7.2% in April.
The central bank told Reuters last week it may consider taking stronger measures to steer inflation back to its 3% target if elevated inflation expectations become entrenched.
This followed BSP Governor Eli M. Remolona, Jr.’s statement in May that the Monetary Board was considering an off-cycle hike before their scheduled June review.
Based on Chinabank’s forecast, headline inflation could stay below 7% in the coming months to average 5.7% by yearend and will likely cool further to return to the BSP’s target at 3.8% in 2027.
These are slower than the BSP’s 6.3% and 3.8% estimates for 2026 and 2027.
Ms. Velasquez said elevated inflation this year will be driven by higher rice costs amid the looming El Niño season, though offset by gradually declining oil prices.
Ms. Velasquez also noted that the peso’s weakness against the dollar is benefiting the country’s exports and business process outsourcing industry, though she warned against sharp depreciation.
“But in the short term, these industries will not adjust, right? So, it’s going to take like a medium-term trend,” she said. “What we don’t want is sudden depreciation of the peso which I think the BSP has actually been monitoring.”
The Chinabank economist said they are “very positive” on the peso’s performance in the months ahead, but their “best worst-case scenario” sees the local unit hitting P63 to the dollar.
Since the war erupted on Feb. 28, the peso has moved to the P61-per-dollar range.
It averaged P61.441 against the greenback in May, about 1.91% or P1.1497 weaker than P60.2913 in April, according to central bank data.
The BSP has repeatedly said it steps in the foreign exchange market to smoothen out sharp inflationary swings, but not to maintain a specific exchange rate level. — Katherine K. Chan
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