PH economy can absorb rate hikes, says DBS

The growth of the Philippine economy is expected to further slow down in the next quarters but the country can still absorb any additional increase in interest rates, as the Bangko Sentral ng Pilipinas (BSP) is expected to do later this week, according to DBS Bank.

The Singapore-based bank said in a commentary penned by Chua Han Teng that this was so even if the slower-than-expected expansion of gross domestic product (GDP) in the second quarter was partly due to monetary policy tightening that started in the same period.

Philippine GDP grew by 7.4 percent in the second quarter from 8.2 percent in the first quarter. The Monetary Board (MB) raised the BSP’s policy rate twice in the second quarter for a total of 0.5 percentage point (ppt).

The central bank’s overnight borrowing rate was raised further by 0.75 ppt in July to bring it to 3.25 percent from a pandemic-prompted historic low of 2 percent before the BSP started normalization.

Slowing growth

“The [Philippine] economy is on track to grow by 7 percent this year, but the postpandemic boom is slowing, and growth will likely revert to the trend rate of 6 percent in the coming quarters,” DBS said.

The bank said further monetary policy normalization by the BSP during the Aug. 18 MB policy meeting is highly likely, with the rate hike choices narrowed to 25 basis points or 50bps [0.25 ppt or 0.5 ppt], as signalled earlier by BSP Governor Felipe Medalla.

“A high priority on inflation over growth tilts the balance toward a frontloaded interest rate increase of 50bps [0.5 ppt this week],” DBS said.

The group added that the yet-unseen peak of inflation in the Philippines was likely to keep monetary authorities resolute in their fight to tame increasing price pressures and ensure inflation expectations do not stray from the government’s target of 2 to 4 percent.

Earlier this month, Medalla said that July’s inflation raises the probability of a 0.5-ppt hike rather than a 0.25-ppt increase this month.

DBS added that while second-quarter GDP growth was slower than the first-quarter’s pace, it was still higher than the prepandemic trend of about 6.2 percent. It was also within the BSP’s expected range.

This implies “that the economy is still in a decent position to handle further monetary tightening,” DBS said.

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