BSP needs to start raising interest rates by year’s end, says Villegas

University of Asia and the Pacific economist Bernardo Villegas sees a need for the Bangko Sentral ng Pilipinas (BSP) to start raising local interest rates—currently at record-low levels and way below the inflation rate—by year-end or early next year.

In a forum with the Chamber of Thrift Banks on Wednesday, Villegas—also known as a “prophet of boom”—also said that despite a slow economic recovery in 2021, the Philippines had not experienced any economic scarring from the pandemic.

By the second quarter of 2022, Villegas said the country could aspire for a 6-7 percent gross domestic product (GDP) growth, which could accelerate to 7-8 percent by 2023.

He said the pandemic had not wiped out the country’s geographic advantage and demographic advantage coming from the country’s mostly young, English-speaking population.

Even during the pandemic, he said remittances and the information technology-business process outsourcing industry remained resilient. Over the long-term, he said mining and tourism could add to the growth drivers.

Asked about whether record-low interest rates were sustainable, Villegas said: “I don’t want to speak for [BSP] Governor (Benjamin) Diokno, but I think they will have to increase interest rates sooner than later. It’s not sustainable.”

The BSP’s overnight borrowing rate is currently at 2 percent, the lowest level in history, while year-on-year inflation rate in the first nine months has averaged 4.5 percent.

Villegas said other countries were already starting to tighten their interest rates.

“So we’re not going to be exceptional. In my opinion … interest rates are not really the main moving force for investment in this country. So, if I were an adviser to central bank, I would tell them to really consider increasing the interest rates, let’s say, toward the end of this year or early next year.”

Meanwhile, Villegas said the next administration would have to tighten its belt as the country’s debt level had surged during this pandemic, equivalent to 50-60 percent of GDP.

Economic liberalization, he said, would be one way to address this, but as this required Constitutional reforms, the government would just have to improve significantly the effectiveness of taxation, such as by taxing internet-based businesses. This will fund the continuation of infrastructure-building and increased investment in education and health care.