World Bank sees BSP rate cuts as inflation further eases

MANILA, Philippines — To support economic growth, it would be prudent for the Bangko Sentral ng Pilipinas (BSP) to cut policy rates once headline inflation falls below target, an economist of the World Bank said.

Speaking during the general membership meeting of the Management Association of the Philippines (MAP) yesterday, World Bank senior economist for the Philippines Rong Qian said maintaining high interest rates over the long-term is expected to have a negative impact on growth.

“In the long-term if we maintain high interest rates, yes it will have an impact on growth and it would be prudent to reduce it if inflation goes down as predicted,” she said. 

“As an economist, I would say higher interest rates weigh on the long-term. But I think as a policy maker, when inflation is coming down and their only goal is to manage inflation and not growth, then when inflation goes down to below target, then they are more likely to reduce interest rates to give them policy room,” she added.

The BSP’s Monetary Board kept policy rates steady at 4.75 percent during its Feb. 7 meeting and lowered the inflation forecast this year to 3.07 percent from an earlier projection of 3.18 percent.

High interest rates weigh on consumption and investments at a time when the Philippines needs to needs to accelerate capital accumulation and sustain high productivitity in the long term to sustain its growth momentum and make growth more inclusive.

In her presentation, Qian said the country’s economic growth prospects remain positive but internal and external uncertainties have heightened.

To make growth more sustainable and inclusive in the long-term, Qian said the country needs to sustain a growth level of 6.5 percent until 2040. The bank forecasts the domestic economy to grow by 6.5 percent this year and 6.6 percent throughout 2020 and 2021.

The current income per capita of around $3,800 must also be tripled in the next two decades for poverty to fall to zero by 2040 from 33.7 percent in 2015.

Qian therefore urges improving market competition and ease of doing business to foster innovation and knowledge spillover.