On Oct. 26, the Monetary Board (MB) raised the reference interest rate by 25 basis points to 6.5% effective Oct. 27, earlier than the expected review cycle, to slow down the rate of price increases of goods and services. The worry was about inflation, which had risen to 6.1% in September from 5.3% the previous month (CNN Philippines, Oct. 26). Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona said it may not yet be the end of policy rate adjustments for the year. The Monetary Board will next meet on Nov. 16 to determine if it will continue to tighten monetary policy. New consumer price index and third quarter economic data figures were expected to be released before this date.
On Nov. 9, the Philippine Statistics Authority (PSA) did release the third quarter economic data figures: the economy grew by a higher-than-expected 5.9% in the third quarter despite the elevated prices of goods. Gross domestic product (GDP) growth rebounded in the third quarter from the disappointing 4.3% recorded in the second quarter. The Philippines has claimed to be the fastest-growing economy in Asia among those that have released their third quarter GDP growth figures: Vietnam at 5.3%, Indonesia and China at 4.9%, and Malaysia at 3.3% (Rappler, Nov. 9).
Surprisingly, headline inflation dropped to 4.9% in October 2023 compared to the 7% in October 2022. The PSA shows the monthly inflation rates decelerating from a peak of 8.7% in January 2023 to 4.7% in October, at the 4.9% level of July, when the optimism of the finance managers was high that inflation was being reined in with the help of the raised borrowing interest rates imposed since March. Higher interest rates would discourage borrowing, which in turn would control spending that would have stimulated more inflation from the increased demand if lower interest rates allowed more spending from excess money going around. Phew! Long explanation, yet persistent inflation has bugged the economy for years even before the COVID-19 pandemic and its restrictions.
“The Monetary Board recognized the need for urgent monetary action (the raising of interest rates) to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations,” Mr. Remolona said, worrying about the uptick of inflation to 6.1% in September.
Economist JC Punongbayan pointed out that “the recent drop (in inflation) surprised even the Bangko Sentral ng Pilipinas itself, which forecasted 5.1% to 5.9% for October. Inflation went down (to 4.9%), faster than they expected (Rappler, Nov. 8). “The thing is, we don’t want inflation to move up and down so much, because that makes peoples’ purchasing power — and thus their ability to budget, plan their spending, and provide for their families — just as volatile… Besides, if inflation is due largely to food items (like rice and vegetables), then interest rate hikes will do little (if anything at all) to tame overall inflation,” Punongbayan said.
The PSA confirmed that “The primary driver to the downward trend of the overall inflation for the bottom 30% income group in October 2023 was the lower year-on-year growth in the heavily weighted food and non-alcoholic beverages at 7.6% during the month from 10.4% in the previous month. Also contributing to the downtrend was housing, water, electricity, gas and other fuels which dropped further by 2.3% in October 2023 from a 1.4% annual decrease in the previous month.”
Around half of Filipino families considered themselves poor during the second quarter of 2023, according to a survey conducted by OCTA Research. The poll, carried out from July 22 to 26, found that 50% of Filipino families, or around 13.2 million households, rated themselves as poor (Sept. 19).
That food-led inflation, mainly suffered by the bottom 30% income group, has caused sticky prices and volatility in markets urges attention to National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan’s warnings against further interest rate hikes contemplated by the BSP/Monetary Board. “Raising interest rates will hurt the economy, will hurt consumers, will hurt producers. And that has also long-term effects,” he told reporters in a press chat on Oct. 6. “We have been the most aggressive in our region in raising interest rates,” he said. “The economy could withstand more rate hikes if necessary, but doing so would put the economy quite far away from our peers in the region.”
Mr. Balisacan does not believe monetary tightening is the right tool to use. “We also know very well that the source of the inflation is supply side. It’s not the demand side; that requires monetary solution,” he told reporters (Rappler, Oct. 6). Other analysts have also challenged the effectiveness of the BSP’s rate hikes, saying they were ineffective against the supply-side pressures on inflation.
Mr. Balisacan was also concerned that higher borrowing costs could have an impact on foreign exchange rates and make the country’s exports more expensive. Since May 2022, the BSP has hiked its key policy rate — which influences interest rates charged by banks — by a total of 425 basis points in an effort to rein in persistent inflation.
A further complication to the peso-foreign exchange rate is the parallel effort of the BSP to match the aggressive rate hikes delivered by the US Federal Reserve. On Nov. 1, the Federal Open Market Committee (FOMC), the Fed’s policy-setting body, voted unanimously to hold the influential fed funds rate at a range of 5.25% to 5.50%. The rate has been in that range since July and is the highest since 2001. It was the second meeting in a row that officials were content to leave the Fed’s key interest rate unchanged, in the first two-meeting pause since March 2022 when the Fed began hiking rates from near zero in an effort to slow the economy, as reported by investopedia.com.
“A policy statement issued by the FOMC was little changed from the one it released at its last meeting in September. It emphasized the need to control inflation while acknowledging high interest rates could hurt the economy more the longer they stay in place, while leaving the door open for further increases if inflation doesn’t continue its downward trajectory.” Yet analysts say, The Fed’s anti-inflation interest rate hikes haven’t stopped consumers from spending but have hurt the economy in other ways by driving up borrowing costs. The real estate market has been especially hard hit by mortgage rates that have more than doubled in the last two years, making housing unaffordable for most (Ibid.).
Due to the aggressive rate hikes delivered by the US Fed to tame inflation last year, the dollar-pegged peso slumped by as much as 15.7% to hit a new all-time low of P59 to $1 in October 2022. Fitch Solutions said it expects the peso to weaken to P56.50 to $1 this year before strengthening to P54.50 to $1 next year (The Philippine Star, Feb. 2, 2023).
As even the US experience shows, it is a hard act, balancing monetary and fiscal policies, demonstrated in the tension between the BSP and NEDA debate on interest rate increases.
Some technocrats suggest incentives to agriculture and other production/service sectors, or tax breaks to individual and company income, to encourage savings and investments. But perhaps first the banks might share some of their bonanza in profits from the higher lending rates that follow from the rate hikes established by government, by increasing deposit rates to encourage savings. A leading commercial bank posted a 0.125% p.a. gross interest rate on savings deposits for a minimum required daily balance of at least P2 million. The saver/depositor effectively “earns” nothing if the inflation rate of 4.9% is deducted from the gross interest rate (0.125 – 4.9 = -4.775).
Other options for short-term investments (government issued):
• Treasury Bills (over 31 days), September 2023, 5.89% p.a. interest rate
• Money Market Rate, August 2023, 6.32% p.a. interest rate
We consumers just hope our leaders, particularly our economic planners and managers in government, are studying our situation well, as we trust them in their sworn duty to serve the Filipino people honestly, effectively and efficiently. In the lingo of the hopeful, resilient youth (the median age of the estimated 2023 population of 117.9 million Filipinos is 25 years old): We pray pa more for better times.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.