IMF sees need for further tightening

THE BANGKO SENTRAL ng Pilipinas (BSP) should continue tightening monetary policy until 2023 to anchor inflation expectations and support the peso, an International Monetary Fund (IMF) official said.

“The BSP has been prompt in tightening, a move that we support. However, if inflation pressures remain high, there will be more work to do,” IMF Director for Asia Pacific Department Krishna Srinivasan said in a recorded message during the BusinessWorld Economic Forum Forecast 2023 at the Grand Hyatt Manila in Taguig City on Tuesday.

He said further monetary policy tightening might be needed through 2023 at least until it is clear inflationary pressures are beginning to recede.

The IMF projects Philippine inflation to average 5.3% this year before easing to 4.3% in 2023. Both projections are beyond the BSP’s 2-4% target.

Mr. Srinivasan said it expects inflation to further ease to 3.1% in 2024.

“More monetary tightening will weigh on growth on 2023, but we think that the growth recovery will continue, because even with heightened interest rates, the monetary policy start will be roughly neutral,” he said.

IMF forecasts 6.5% gross domestic product (GDP) growth for the Philippines this year, matching the lower end of the government’s 6.5-7.5% goal. It expects growth to slow to 5% in 2023, well below the 6.5-8% target.

Since May, the BSP has raised borrowing costs by 300 basis points (bps), bringing the benchmark rate to a 14-year high of 5%. It is widely expected to deliver another 50-bp rate increase on Dec. 15. 

“The BSP is tightening monetary policy to rein in inflation and this is alleviating some of the downward pressure on the peso.” Mr. Srinivasan said. “As long as the depreciation is driven by fundamentals, it will be difficult to use foreign exchange intervention to lean against it in an effective manner.” 

“However, if market conditions become disorderly, the BSP might want to consider foreign exchange intervention to reduce excessive volatility,” he added. 

POLICY MIX
Meanwhile, the IMF executive board said the Philippine outlook for 2023 is more challenging amid a more uncertain global environment.

“Calibrating the policy mix to preserve macroeconomic stability, enhancing fiscal and financial resilience and accelerating structural reforms are critical to sustain the recovery,” it said in a statement after concluding the 2022 Article IV consultation with the Philippines.

“Policies will have to remain nimble, carefully balancing growth and price stability objectives, while managing limited fiscal buffers, preserving financial stability and ensuring external sustainability.”

While the current policy stance remains accommodative, the IMF executive board said the BSP “should aim at bringing the policy rate close to the neutral real rate to securely bring inflation within the target range.”

Inflation accelerated to 7.7% in October from 6.9% in September. It averaged 5.4% in the first 10 months of the year, still below the BSP’s 5.8% forecast this year.

“Should inflation pressures continue to rise, the BSP should respond with a tighter policy stance. Similarly, if inflation proves less persistent, or if significant downside risks to growth materialize, monetary policy tightening would need to be recalibrated,” the IMF executive board said. 

The BSP should closely monitor risks to financial stability amid rising interest rates and higher risks to growth, it said.

The board noted that nonfinancial corporations (NFCs) might face renewed risks due to higher borrowing costs.

“These risks can be amplified through ‘mixed’ conglomerate structures that include NFCs and financial institutions, and in sectors with a relatively high debt burden,” the IMF said.

“To enhance resilience, the BSP’s capacity to conduct financial stability risk assessments and the bank resolution framework should be strengthened. In addition, with the recovery underway, regulatory forbearance measures should be allowed to lapse as scheduled,” it added. — Keisha B. Ta-asan