Strong GDP expansion gives BSP room to further hike rates

MANILA, Philippines — The impressive economic growth posted by the Philippines in 2023 will give the Bangko Sentral ng Pilipinas (BSP) more space to further raise interest rates in case of shocks, according to economists.

Aris Dacanay, economist for ASEAN at HSBC, said that the Philippines is well positioned to become the fastest growing economy in the region after its gross domestic product (GDP) grew by 5.6 percent in 2023.

Although slower than the 7.6-percent expansion recorded in 2022 and lower than the government’s six to seven percent target, Dacanay said the growth was above market expectations.

“If there would be no major upside surprise in Indonesia’s fourth quarter 2023 GDP release next week, the Philippines is in a strong position to emerge as ASEAN’s fastest growing economy in 2023,” Dacanay said.

He said that the 5.6-percent growth in the fourth quarter of last year, although slower than the six-percent expansion in the third quarter, was also well above market expectations.

According to Dacanay, the Philippines saw the fastest inflation rate in ASEAN and the most aggressive tightening cycle made across the region’s central banks.

“But the archipelago only flinched as it continued to sprint, growing above market expectations for the majority of the year. Yes, full-year growth was below trend at 5.6 percent, but it was impressive, all things considered,” he said.

Inflation accelerated further to six percent in 2023 from 5.8 percent in 2022, breaching the central bank’s two to four percent target for two straight years.

“With growth impressive, we think the Bangko Sentral ng Pilipinas (BSP) has room to tighten policy further if upside risks in inflation emerge. However, we don’t think the fourth quarter 2023 print was high enough to warrant a rate hike in the February rate-setting meeting,” Dacanay said.

The first rate-setting meeting of the seven-member Monetary Board is scheduled on Feb. 15.

“Nonetheless, if inflation in the first half of 2024 continues to ease (which is our baseline scenario), we believe the BSP would keep its monetary stance unchanged at 6.50 percent,” he said.

According to Dacanay, the central bank will only do its first rate cut at the same time as the US Federal Reserve in the second quarter of this year.

For 2024, the British banking giant sees the Philippine economic expansion slowing further to 5.3 percent, but believes risks are tilted on the upside with the labor market performing stronger and easing inflation.

Despite having one of the highest policy rates and inflation in the region, Bank of the Philippine Islands lead economist Jun Neri said the country likely registered one of the highest real GDP growth in 2023.

Neri said the country’s fourth quarter GDP growth could have been a lot faster if government spending in the third quarter had been maintained.

Government spending contracted by 1.8 percent in the fourth quarter of 2023 after expanding by 6.7 percent in the third quarter.

“Its possible that capital formation growing double-digit in the fourth quarter means positive real interest rates can be maintained in 2024 without necessarily slowing the economy much,” Neri added.

ANZ chief economist Sanjay Mathur and economist Debalika Sarkar said the BSP is expected to deliver its first rate cut in the fourth quarter of the year.

“Based on this growth outlook and further moderation in inflation, we believe the BSP will deliver its first rate cut in the fourth quarter of 2024. We forecast the year-end policy rate at six percent,” they said.

ANZ sees a GDP growth of 5.6 percent this year, driven by stable private consumption and a modest improvement in exports.