Hawkish BSP cautioned versus ‘hard landing’

Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)

The Bangko Sentral ng Pilipinas (BSP) may have more room to raise interest rates further with the domestic economy growing by as much as 7 percent in 2022, but it was warned that too much policy tightening might lead to a so-called hard landing.

In separate commentaries, Fitch Solutions penciled in a 6.1-percent growth in Philippine gross domestic product (GDP) for this year while Moody’s Analytics put it at 7 percent.

The government’s own assumption is that GDP growth will fall within 6.5 percent and 7.5 percent this year.

“The Philippine economy’s resilience should provide the BSP with room to step up the pace of policy tightening,” Fitch Solutions said, noting that the Monetary Board last week jacked up the central bank’s key policy rate by 0.75 percentage point to 3.25 percent.

BSP Governor Felipe Medalla himself, in announcing the rate hike, said that favorable conditions arising from the strong rebound in growth thus far in the year—alluding to the 8.1-percent growth recorded in the first quarter—suggest that the domestic economy can accommodate a further tightening of monetary policy settings.

“Indeed, at 53.8 [points], manufacturing PMI (purchasing managers’ index) readings remain well above the 50 level and the number of daily flights are only 26 percent below 2019 levels, compared to 49 percent in late March,” Fitch Solutions said.

“Our forecast is for GDP growth to come in at 6.1 percent in 2022, as a result of sustained normalization of economic activities after COVID-19 restrictions have been largely eased,” it added.

Fitch Solutions believes that BSP is likely to bring its key policy rate to 4.25 percent by the end of this year. That means an additional increase totaling one percentage point across four more policy meetings remaining this year.

This is needed, Fitch Solutions added, to rein in inflation, which will likely stay well above the BSP’s target range of 2 percent to 4 percent throughout the rest of 2022.

“Further rate hikes will also help to limit downside volatility to the Philippine peso which has come under significant depreciatory pressure as a result of tightening credit conditions globally,” the company added.

Meanwhile, Moody’s Analytics expects at least two rounds of rate hikes this year, which will take the BSP’s key policy rate to above 4 percent.

But Moody’s Analytics warned that raising interest rates aggressively can be a double-edged sword in that, on one side, higher interest rates can take some steam off rebounding domestic demand and cool inflation.

“On the other side, higher rates risk a hard landing if policymakers overcompensate as households and businesses pull back on spending and investments,” it said. “The BSP will need to strike a fine balance, as it will not want to stifle the postpandemic growth as it seeks to keep inflation under control.” INQ