Interest rates must stay ‘higher for longer,’ says IMF
MANILA -The “decisive” monetary tightening done by the Bangko Sentral ng Pilipinas as well as the moderate hikes in the minimum wage helped mitigate upward pressure on inflation, but interest rates may need to be kept higher for longer as the rate of price increases could be worse than expected, according to the International Monetary Fund.
This was the preliminary finding of a visiting IMF team that wrapped up their latest two-week mission on Tuesday, a written report about which is slated for issue in November.
Meanwhile, in an October addition to their World Economic Outlook 2023 report, the IMF said the fragmentation of the global commodity market — as Russia’s invasion of Ukraine divides the world into two hypothetical geopolitical blocs—could lead to “significant price swings.”
“Commodity price volatility could intensify as a result of smaller market sizes and the incentives for producers to switch geopolitical allegiances,” the report said. “This could result in volatile inflation dynamics, making monetary policy more complex.”
The IMF mission to the Philippines, led by Shanaka Jayanath Peiris, noted that the monthly readout of inflation was now expected to return to the central bank’s target band of 2 percent to 4 percent by the first quarter of 2024.
But Peiris said core inflation—which excludes volatile items in the food and energy baskets—remained high and inflation risks were tilted to the upside, including higher commodity prices that could lead to second-round effects.
READ: BSP rates seen staying higher for longer
“Thus, a higher-for-longer policy rate path is warranted until inflation firmly falls within the target range alongside a tightening bias to anchor inflation expectations,” Peiris added.
Bounce back
Also, the IMF mission believes that the Philippine economy would “bounce back” during the latter part of this year after the slowdown in the second quarter.
However, the multilateral lender scaled back its 2023 forecast to 5.3 percent from its estimate of 6 percent made last May.
Peiris said the domestic economy had faced “a confluence of global shocks” after having emerged strongly from the impact of the COVID-19 pandemic.
Notably, annual growth slowed to 4.3 percent in the second quarter this year from 7.6 percent in the same period of 2022, mainly due to a weak global economy and tightened policy settings.
READ: PH economy to become 18th biggest by mid-century
Peiries said in a briefing with journalists that the growth rate of the Philippine domestic economy had “bottomed out” in the second quarter and was seen to bounce back, thanks to an acceleration in public spending and improved external demand for exports.
“The main downside risks to the outlook include persistently high global and domestic inflation that could necessitate a further tightening of monetary policy, an abrupt global slowdown putting downward pressure on goods and services exports, an intensification in geo-political tensions, and depreciation pressures stemming from capital outflows under volatile market conditions,” he said.
“On the other hand, a more resilient US economy and a rebound in domestic demand supported by an easing of financial conditions provide upside risks,” he added. INQ
