Interest rates already at ‘highest level’ — Diokno

By Luisa Maria Jacinta C. Jocson and Keisha B. Ta-asan, Reporters

THE MONETARY BOARD will likely pause at its Nov. 16 meeting as policy rates have “reached the highest level,” Finance Secretary Benjamin E. Diokno said.

Analysts also noted that there is less pressure now for the Bangko Sentral ng Pilipinas (BSP) to hike at the next meeting after the US Federal Reserve kept interest rates steady last week, although domestic inflation remains a key concern.

“I think we have reached the highest level… given the decline in inflation, there’s no justification for higher interest rates,” Mr. Diokno told reporters on the sidelines of an event on Monday. “I think it will be a hold next week, that’s why (Governor Eli M. Remolona, Jr.) decided on an off-cycle hike.”

The BSP is scheduled to have its second-to-the-last rate-setting meeting on Nov. 16. Last month, the Monetary Board raised borrowing costs by 25 basis points (bps) in an off-cycle move, bringing the benchmark interest rate to a 16-year high of 6.5%.

Mr. Diokno said that the current policy rate is already the “maximum.”

“Our prospects next year are good, hopefully the (Israel-Hamas) war will not worsen, although the impact of this is just remote. And oil prices are falling, and the peso is strengthening so the impact of that is good,” he added.

Mr. Diokno and National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan earlier cautioned against further monetary tightening due to its long-term impact on economic growth.

However, the Finance chief noted that third-quarter economic growth “definitely will be better than the second quarter” because of ramped-up infrastructure expenditures and slower inflation.

The Philippines’ gross domestic product (GDP) grew by a weaker-than-expected 4.3% in the second quarter, partly due to the 7.1% contraction in government spending.

A BusinessWorld poll of 18 economists and analysts last week yielded a median GDP growth estimate of 4.9% for the third quarter. Third-quarter GDP data will be released on Thursday (Nov. 9).

Mr. Diokno said the lower end of the government’s 6-7% GDP growth target is also still doable.

“We have to grow by 6.6% for the second half so let’s see. But even a 5.9% growth, that’s good enough, we’re still the fastest growing in this part of the world,” he added.

FED PAUSE
Meanwhile, Makoto Tsuchiya, an economist at Oxford Economics, said the Fed’s policy decision may allow the BSP to pause rather than hike on Nov. 16.   

“(The Fed pause) lessens the need for the BSP to pay attention to the interest differential and the exchange rate weakness,” Mr. Tsuchiya said in an e-mail.   

“But at the same time, I think the BSP is more concerned about domestic inflation rather than the currency movement at this particular point in time, although it is true that weaker currency could eventually lead to higher domestic prices through imported inflation,” he added.

The US central bank kept borrowing costs unchanged at 5.25-5.5% for the second straight meeting last week. This was after it hiked policy rates by 525 basis points (bps) from March 2022 to July 2023.   

In a Viber message, Security Bank Corp. Chief Economist Robert Dan J. Roces said the Fed pause, a likely last rate hike from the BSP, and remittance inflows during the holiday season may support the peso in the coming months.   

BPI Lead Economist Emilio S. Neri, Jr. said the BSP will consider not just the Fed decision, but October inflation and third-quarter GDP growth to “check if monetary settings need a follow through adjustment immediately or can be held steady until their meeting.”

A BusinessWorld poll of 13 analysts conducted this week yielded a median estimate of 5.7% for October inflation, well within the 5.1-5.9% forecast of the BSP. If realized, October inflation would be slower than 6.1% in September and 7.7% in the same month last year. The local statistics agency will release the inflation data today (Nov. 7).   

“We may be in a different boat than those of the US, and the BSP has left the door open for another 25-bp hike in November,” Mr. Roces said.   

However, slower core inflation in October and weaker-than-expected GDP data for the third quarter could prompt the BSP to pause.

Mr. Remolona earlier said there is a good chance that the Monetary Board would keep the key policy rate at 6.5% at its next meeting.

“We currently expect the US Fed to start cutting the policy rate in the third quarter. We think the BSP can cut the rate earlier in the second quarter, if domestic inflation declines as we expect in the latest baseline,” Mr. Tsuchiya said.   

“However, we think the risk is tilted towards a longer pause, especially given recent price volatility and higher-for-longer stance from the US.

The BSP sees average inflation at 5.8% for 2023, before easing to 3.5% in 2024 and 3.4% in 2025. However, officials said the BSP would revise its inflation forecasts on Nov. 16.