NEDA chief Balisacan not in favor of further rate hikes

National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan is against raising interest rates further, citing its potential to slow down economic growth.

While he is not part of the policy-setting Monetary Board, the country's chief economic planner said, “If I were in the Monetary Board, I would say no, because we have been the most aggressive in raising interest rates in the region.”

Since May last year, the Monetary Board has raised interest rates by a total of 425 basis points to temper rising inflation.

In its September meeting, monetary authorities kept rates unchanged at 6.25% for the target reverse repurchase (RRP), the overnight deposit facility rate at 5.75%, and the overnight lending facility rate at 6.75%. The same rates have been in place since March 2023.

Bangko Sentral ng Pilipinas Governor Eli Remolona, however, hinted at a possible rate hike in November as inflation expectations for the year have been hiked to 5.8% from the previous forecast of 5.3%, and to 3.5% from 3.3% for 2024.

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation by controlling the money supply by raising borrowing costs.

For example, the BSP sets the overnight reverse repurchase rate or the key policy rate, in which the central bank borrows from banks to maintain price stability.

This, in turn, impacts the country’s money supply as it shifts money from banks into the central bank.

Balisacan said higher interest rates increase the cost of production and depress domestic demand.

“And the impact is long term. If you do it now, you still feel it down the road,” the NEDA chief said.

The country’s chief economist added that the source of inflation is the supply side, thus monetary policy is not an appropriate solution.

“It’s not the demand side that requires a monetary solution… There is no urgency in creating another round of higher interest rates. Higher interest rates will put us quite away from our peers in the region,” Balisacan said.

Inflation, which measures the rate of increase in prices of consumer goods and services, grew faster at 6.1% in September from 5.3% in August, as food and transport costs weighed on prices amid domestic and external supply challenges. https://www.gmanetwork.com/news/money/economy/884235/inflation-faster-at-6-1-in-september/story/

“As executives, we should address [inflation on the] supply side... This inflation is obviously coming from the supply side,” Balisacan said.

The NEDA chief was asked if the economy can still handle further interest rate hikes.

In response, Balisacan said, “It can. But it’s unnecessary.” 

He added that higher interest rates could also affect the exchange rate between the Philippine peso and the US dollar, or could make the local currency stronger.

But, this, in turn, could make the peso less competitive.

“A very strong peso relative to our trading partners and peers in the region, hurt our exporters, local producers whose products are for imports… That's easily two-thirds of the economy,” Balisacan said.

The economy, as measured by gross domestic product or the total value of goods and services produced in a specific period, grew by 4.3% —its slowest pace in nine quarters since the country entered the positive territory in the middle of 2021. 

This is slower than the 6.4% GDP growth rate seen in the first quarter, blamed on high inflation, elevated interest rates which tempered domestic consumption as well as tepid government spending during the period.