THE Bangko Sentral ng Pilipinas’ (BSP) latest rate hike could further weaken household consumption and business investment, weighing on economic growth into 2027 as its fuller effects emerge over the next two to four quarters, economists said.
“Higher borrowing costs could discourage some households from taking out loans, particularly for housing, vehicles and other durable goods,” former BSP Deputy Governor and GlobalSource Partners, Inc. country analyst Diwa C. Guinigundo told BusinessWorld in a Viber message.
“Businesses may also become more cautious about borrowing and undertaking new investments as the cost of capital increases,” he added.
Last month, the Monetary Board delivered an aggressive 50-basis-point rate hike to bring the benchmark rate to 5.5%.
This is as inflation averaged 5.4% in the first nine months, after accelerating to 7.2% in September.
The central bank signaled it was prepared to continue tightening amid broadening inflation risks from persistent price shocks and a strong El Niño.
Mr. Guinigundo said the effects of the rate hikes would not be immediate or uniform.
“We should begin seeing the transmission through bank lending and market interest rates in the coming months, with the fuller impact on aggregate demand and GDP (gross domestic product) becoming apparent over the next two to four quarters,” he said.
Mr. Guinigundo said the BSP’s rate hikes seek to prevent inflation from becoming entrenched and inflation expectations from becoming de-anchored.
“Allowing this to happen would ultimately be more damaging to household purchasing power, business confidence and sustainable economic growth,” he said.
“The objective is to contain inflation now without sacrificing the economy’s medium-term growth prospects,” he added.
Mr. Guinigundo said the economy was already losing momentum even before the latest rate hike.
The economy grew by 2.3% in the second quarter, amid sluggish growth in household consumption and a contraction in gross capital formation.
This brought first-half growth to 2.6%, well below the government’s 3.5%-4.5% target for the year.
Mr. Guinigundo said he would not revise his growth outlook solely because of the latest rate hike, although risks have shifted to the downside.
“I would therefore be cautious about expecting a strong recovery next year. Much will depend on how quickly inflation moderates, whether consumer confidence recovers, and whether private investment and government infrastructure spending regain momentum,” he added.
Jose Enrique “Sonny” A. Africa, executive director of IBON Foundation, said the impact on borrowing and investment decisions could be immediate, although the broader effects on consumption, employment, incomes and growth would take longer to emerge.
“Especially with El Niño risks, this makes 2027 particularly vulnerable,” he said in a Viber message.
Mr. Africa questioned the use of monetary tightening to address inflation driven by supply problems.
“The BSP’s demand-tightening rate hikes in response to supply-side inflation are misguided and will further constrain production, investment and employment,” he said.
Mr. Africa said elevated interest and slowing government spending would make the government’s 5-6% GDP growth target for next year even more unrealistic.
He also warned that the proposed P7.2-trillion national budget would provide limited support for growth, with rising interest payments taking up a substantial share of the spending increase.
“As it is, the 2027 budget is an austerity budget that dampens economic growth,” Mr. Africa said, noting that the growth in spending, excluding interest payments, would be insufficient to keep pace with rising prices.
STAGFLATION
Both economists flagged the risk of stagflation, although they stopped short of declaring a prolonged stagflationary crisis.
“The Philippines is accelerating towards stagflation. Growth has been slowing and will be choked further, while inflation threatens to stay above 7% into the new year,” Mr. Africa said.
“While it is premature to declare a prolonged stagflationary crisis, the combination of weak growth, high inflation and deteriorating household incomes is already an extremely serious problem,” he added.
Mr. Guinigundo likewise cautioned that “it may be premature to conclude that we are already in a full-blown stagflationary episode.”
“We clearly have the combination of elevated inflation and slowing economic growth. But stagflation, in its fuller sense, implies a more prolonged period of persistently high inflation accompanied by stagnating output and a weakening labor market,” he said.
Mr. Guinigundo warned that supply-side shocks, including higher oil prices, food supply disruptions and El Niño, could keep inflation elevated even as higher interest rates and weak confidence constrain demand.
“This is precisely why we need a balanced policy response. Monetary policy must prevent inflation expectations from becoming entrenched, while fiscal and structural policies must protect vulnerable households, improve productivity and restore the right conditions for investment and growth,” he said. — Justine Irish D. Tabile