‘Economy can handle another rate increase’

MANILA, Philippines — The Philippine economy can still absorb another interest rate increase if needed, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said, as inflation remains elevated while growth is expected to recover in the second half.

Asked if the economy could handle future rate hikes, Remolona told reporters it could still absorb another 25-basis-point increase.

He said the impact of a modest rate hike would remain manageable, especially when adjusted for inflation.

With inflation running at around six percent, the BSP’s nominal policy rate remains low in real terms.

The country’s gross domestic product (GDP) grew by 2.8 percent in the first quarter, the weakest in five years, as high fuel prices triggered by the Middle East conflict and lower infrastructure spending caused by the flood control scandal weighed on the economy.

The government is expecting the economy to grow between 3.5 percent and 4.5 percent this year.

Asked if the economy could still grow by at least four percent this year should public spending improve in the second half, Remolona said growth could even exceed that level.

The BSP chief said there is still room for a rebound because a large portion of the government’s spending program has yet to be disbursed.

“The problem this year is that government spending has been lacking. So we expect to recover strongly in the second half of the year,” he said.

According to Remolona, the government’s catch-up spending plan would involve resuming expenditures that should have been made earlier, had public works spending not been affected by tighter scrutiny amid the flood control controversy.

Remolona said the Philippines still has solid fundamentals, citing several years of growth close to six percent. The challenge now is to sustain that growth while reducing poverty and inequality.

Still, he declined to say whether the BSP has enough room to tighten policy further.

The Monetary Board raised borrowing costs by 25 basis points on June 18 to help rein in inflationary pressures, particularly after the economy was hit by an energy shock. The BSP’s latest policy move brought the benchmark rate to 4.75 percent.

Remolona said the government’s immediate priority is to preserve the country’s investment-grade credit rating, especially as the economy deals with the impact of higher energy prices and weaker public spending.

He said the country’s current BBB rating remains strong compared with many emerging markets, but the near-term challenge is to prevent a downgrade.

“The immediate issue is to prevent a downgrade because we were hit by an energy shock,” Remolona said.