Impact of high interest rates to ‘peak’ in ʼ24–BSP

Impact of high interest rates to ‘peak’ in 2024 —BSP

MANILA  The impact of the Bangko Sentral ng Pilipinas’ (BSP) aggressive anti-inflation rate hikes is expected to peak this year, which means economic growth will again end up below the government’s target.

That was according to the BSP’s latest Monetary Policy Report that said the economy was projected to “operate slightly below its potential” in 2024 as high borrowing costs both at home and abroad weigh on demand and investments.

“Domestic economic activity will remain intact over the medium term, but growth could settle below the DBCC’s (Development Budget Coordination Committee) target of 6.5 to 7.5 percent for 2024 and 6.5-8.0 percent for 2025,” the central bank said.


“While the projected impact of the BSP’s policy rate adjustments is likely to peak in 2024, growth in the medium term could also be supported by structural reform measures that could enhance investment climate as well as economic sentiment in the country,” it added.


Prudent move

In what it called a “prudent” move, the BSP last week left the target reverse repurchase rate untouched at 6.5 percent, an over 16-year high, “in consideration of the prevailing risks.”

READ: BSP keeps policy rate unchanged, as expected

The last time the BSP delivered an anti-inflation rate hike was during an off-cycle decision in October last year, when the MB lifted the key rate by 25 basis points. Overall, the BSP had raised its policy rate by a total of 450 bps in the current cycle, among the most aggressive in Asia.

Data showed inflation softened to 2.8 percent in January, the lowest reading in over three years. That was the second consecutive month that price growth moderated to within the BSP’s 2 to 4 percent target after hovering above that range for 20 months.

What’s worrying the BSP at the moment are higher transport charges and electricity rates, as well as costlier oil and domestic food prices.

The central bank is also wary of the additional impact on food prices of a strong El Niño episode.


Base effects

For this year, the BSP said inflation would ease in the first quarter before potentially soaring above the target anew in the second quarter as favorable base effects fade.

READ: PH inflation slowed to 2.8% in January

From there, price growth is projected to return to the target band in the third quarter to end the year at an average of 3.6 percent, a tad lower than the BSP’s previous baseline forecast of 3.7 percent.

In its report, the BSP said consumption would likely draw some strength from a resilient labor market and inflows of remittances from Filipinos overseas, a major lifeline for many households in the country.

“The output gap could be supported by higher consumption owing to higher wages and increased value of remittances amid a peso depreciation,” the central bank said.

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“Meanwhile, potential output is expected to be sustained by improvements in labor market conditions and continued investment growth,” it added. INQ

TAGS: BSP, Business

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