Low interest rates seen to boost economic activity

MANILA, Philippines - The current low interest-rate environment enjoyed by the country will help boost economic activity given slowing growth momentum seen in the second and third quarters.

This was according to Bank of the Philippine Islands lead economist Emilio S. Neri Jr. who made the comment following the Bangko Sentral ng Pilipinas’ decision to leave policy rates steady on Thursday.

“The low interest rate environment in the Philippines may help bolster the relatively slowing economic growth momentum given the winding down of the flurry of government spending in 2013, drying up of election related expenditures, storm-related rebuilding in the wake Yolanda and the reversal of flows of funds from the West,” Neri said in a research note.

The Philippine economy grew by seven percent in the third quarter, slower than the revised 7.6-percent growth recorded in the second quarter and the 7.7 percent in the first three months of the year.

However, the 7.4-percent expansion in the first nine months was still faster than the government’s six to seven-percent growth target.

On Thursday, the BSP kept its overnight borrowing and overnight lending rates at 3.5 percent and 5.5 percent, respectively.

“The BSP opted to keep rates unchanged at its latest meeting indicating that monetary policy was appropriate given the current macroeconomic conditions and that the current monetary policy stance was still supportive of non-inflationary growth,” Neri said.

But the BPI economist noted that the inflation rate may be on the rise in the short-term due to supply shocks following the recent typhoons and the power rate hikes earlier announced by Manila Electric Co.

“BPI-Research maintains the view that the BSP need not hike interest rates and cause undue market stress given that recent inflationary pressures are supply side in nature,” Neri said.

“We will however carefully monitor the possibility of second round effects stemming from the expected increase in inflation that may manifest should wage and transport fare adjustments be approved. Such second-round effects may be exacerbated by the eventual rise in global commodity prices, which typically accompany an economic recovery in developed markets like the US and China,” he continued.