GDP growth within BSP expectations — Medalla

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said on Tuesday, Aug. 9, that the latest gross domestic product (GDP) growth rate of 7.4 percent is within their expected range for the second quarter.

Medalla, however, declined to give a hint of how the lower-than-expected GDP outturn will influence the level of policy rate increase they will decide on when the Monetary Board meets next week, on Aug. 18.

“As a rule, I won’t say anything on how new info will affect policy rates in coming meetings of the MB (Monetary Board),” he said on Viber message. But, Medalla did comment that the 7.4 percent GDP growth was “well within our forecast range.”

The BSP chief last week reiterated that he expects the full year GDP to grow comfortably at seven percent in 2022, which was within the 6.5 percent to 7.5 percent target range of the government. With the first quarter growth of 8.2 percent and the latest at 7.4 percent, GDP has expanded by 7.8 percent in the first half.

Medalla has signalled that the probability of raising the policy rate by 50 basis points (bps) next week is greater after the July inflation hit a new high of 6.4 percent for the year. Inflation year-to-date average at 4.7 percent, above the two percent to four percent government target. Currently, the BSP rate is at 3.25 percent which is a negative real rate given that inflation rate is higher than the key borrowing rate.

In separate commentaries, British bank HSBC and Bank of the Philippine Islands (BPI) economists said high inflation resulted in slower growth in consumption during the second quarter.

HSBC’s Aris Dacanay, who expected the GDP to grow by 7.7 percent in the second quarter, said that with the slower growth, he now thinks the BSP will increase the policy rate by a modest 25 bps next week.

He said with elevated inflation and central banks such as the BSP adjusting rates higher in the second half of 2022, Purchasing Managers Index (PMI) indicators show slowing growth. “The PMI new orders minus inventory measure is now in negative territory in July (and this) can potentially mean that there may not be enough demand in the coming months to consume the goods that were already produced, lessening the need for firms to produce more,” said Dacanay.

He also said the latest GDP print “gives a wispy hint that a bigger slowdown may be arriving soon” with inflation affecting consumption and slower global demand is taking a toll on export demand.

“The risk of higher interest rates may be delaying investments. Not only are these enough to offset the tailwinds from re-opening, but these will likely be more pronounced in 3Q and 4Q of 2022 as the BSP, the Fed, and other ASEAN central banks keep riding (or are about to ride) the tightening express to rein in both demand and inflation,” said Dacanay.

BPI Research, meantime, expects slower growth in the second half of 2022 due to fading base effects and high inflation.

It forecasts a full year GDP growth of 6.3 percent, lower than its previous 6.7 percent projection. The Ayala-led bank said the BSP still have space to hike rates by 100 bps, which will bring the key rate from 3.25 percent to 4.25 percent by end-year.

Despite the slowing economy, BPI said the BSP has leeway for further tightening to “ensure that the pass thru effects of a sharp weakening of the peso doesn’t dampen demand further.”

“Even with the aggressive hikes, interest rates at present are still historically low and accommodative. We believe the economy has enough capacity to absorb additional rate hikes. GDP growth may slow down a bit because of higher interest rates, but it might be worse if inflation goes up further,” said BPI.

As for the exchange rate, BPI expects the peso depreciation to continue in the medium term due to higher import requirements. It noted that dollar demand will keep the peso at the P55 level.

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