MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) still expects respectable economic and lending growth amid the series of aggressive rate hikes that saw the benchmark interest rate jump by 300 basis points to a 14-year high of five percent.
BSP Governor Felipe Medalla said the gross domestic product (GDP) growth target of the Cabinet-level Development Budget Coordination Committee (DBCC) is still attainable amid the ongoing tightening cycle to tame inflation and stabilize the peso.
“We are confident that despite the interest rate hikes that we have done, respectable growth is still very, very feasible,” Medalla said.
The Philippines posted a GDP growth of 7.6 percent from January to September, faster than the 6.5 to 7.5 percent target of economic managers, after recording a stronger-than-expected 7.6 percent expansion in the third quarter .
According to Medalla, growth would still be there even after inflation normalizes. Inflation averaged 5.4 percent from January to October, exceeding the BSP’s two to four percent target, after quickening to a 14-year high of 7.7 percent in October from 6.9 percent in September.
The BSP has raised its key policy rates by another 75 basis points last Thursday to prevent inflation expectations from disanchoring further.
Medalla had signaled that the BSP would match the aggressive rate hikes delivered by the US Federal Reserve to maintain a healthy interest rate differential between the Philippines and the US.
“There are other factors that will affect growth more than the policy rate,” Medalla said.
For instance, the BSP chief said weather is really important for the agriculture sector and the growth of the economy would depend on the competitiveness of the country’s export sector.
“So in other words, the bigger drivers of growth have to do with exports and at the same time Filipino consumer demand remains strong. And we think that with all the backlog in capital formation during the pandemic, capital expenditures will remain strong,” Medalla said.
In a separate interview with CNBC, the BSP chief said he expects the Philippine economy to slow down next year but is unlikely to slip into a recession anew.
“For the Philippines, the question is not the recession but the extent to which growth will decline,” he said.
Medalla said the International Monetary Fund (IMF) sees the Philippine economy growing by a slower five percent next year. The government, however, expects an expansion of at least six percent.
The DBCC has set a GDP growth target of between 6.5 and eight percent from 2023 to 2028.
Despite the rate hikes, BSP Deputy Governor Francisco Dakila Jr. said the growth in bank lending has remained broad-based across industries led by the real estate sector as well as consumers or households.
Latest data from the central bank showed that loan disbursements by big banks went up by 13.4 percent to P10.49 trillion as of end-September from P9.25 trillion a year ago.
Medalla characterized the double-digit growth in bank lending as a function of “animal spirits” as real rates were still supportive and that the banks’ willingness to take risks was high given their solid excess reserves.
“In real terms money is still cheap. So monetary policy is closer to neutral than very tight. So rate hikes are not an obstacle to growth but to excessive lending,” Medalla said.