Elevated interest rates may contribute to slower gross domestic product (GDP) expansion in the second half of 2024.
This was based on the highlights of the Monetary Board’s policy meeting on June 27, 2024 when it decided to keep the overnight borrowing rate at 6.5 percent. The Monetary Board is the policy-making body of the Bangko Sentral ng Pilipinas (BSP).
“Domestic growth prospects remain intact for 2024 and 2025, based on BSP staff estimates. GDP growth may decelerate in second half of 2024 due partly to positive real interest rates, following the BSP’s tightening cycle, and subsequently pick up in 2025. This outlook is consistent with the negative output gap in 2024 to 2025 amid tight financial conditions,” the BSP said.
Data from the Philippines Statistics Authority show that the economy grew 5.7 percent in the first quarter of 2024, below the government’s target range of 6.0 percent to 7.0 percent. It will release the second-quarter GDP data in August.
The BSP kept the interest rates steady as a survey of external forecasters for June 2024 showed inflation expectations staying near the upper end of the target range of 2 percent to 4 percent for 2024, while those for 2025 to 2026 eased further toward the midpoint of the target range.
The mean inflation forecast for 2024 remained at 3.7 percent, relative to the results of the May 2024 survey round. For 2025 and 2026, the mean inflation forecasts declined to 3.4 percent from 3.5 percent and 3.3 percent from 3.4 percent, respectively.
Analysts expect within-target inflation over the policy horizon, although upside risks continue to dominate their outlook owing to supply-side pressures and potential second-round effects, the BSP said.
“On balance, the Monetary Board deems it appropriate to hold monetary policy settings steady at this time. Price pressures are expected to further dissipate in the near term following the implementation of reduced tariffs on rice, along with other non-monetary interventions that could ensure sufficient domestic food supply,” it said.
The BSP said that if sustained, an improvement in inflation outlook would allow the Monetary Board to consider a less restrictive monetary policy stance. However, uncertainty in the external environment requires continued caution against potential spillovers, including those in the financial markets, it said.
The Monetary Board said it considered the latest macroeconomic and financial developments in assessing the monetary policy stance.
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