BSP Advised to Maintain Hawkish Stance Amid Inflation Concerns

GlobalSource Partners has advised the Bangko Sentral ng Pilipinas (BSP) to maintain a hawkish monetary policy for the next two years due to projections of persistent high inflation.

Key Recommendations and Forecasts
Continued Tightening Bias: The BSP is encouraged to retain its tightening bias, as inflation is forecasted to remain above the target for this year and the next. Inflation forecasts indicate rates close to the upper end of the target, warranting sustained monetary cautiousness​​.

Inflation Forecasts: The BSP’s baseline inflation forecast for this year is 6%, significantly above the 2-4% target band. Inflation is expected to ease to 3.7% in 2024 and 3.2% in 2025. However, risk-adjusted forecasts, which consider variables like higher power and petroleum prices, suggest higher rates of 6.1% for 2023, 4.4% for 2024, and 3.4% for 2025​​​​​​.

Monetary Policy Decisions: The Monetary Board has kept its key policy rate at 6.5%, a 16-year high, after cumulative rate hikes of 450 basis points since May 2022. The policy rate could be paused or reduced if inflation falls within the target range by 2025​​.

Economic Growth Challenges: Achieving the government’s 6-7% economic growth target for this year is seen as a “tall order,” particularly with weak demand-side drivers like private consumption. The government’s growth target of 6.5-8% for next year also appears challenging due to various global and local economic pressures​​​​​​​​.

Broader Economic Concerns: Factors such as the depressed global economic scenario, COVID-19 impacts on education and labor, AI’s impact on overseas Filipino workers, and the challenge of converting investment roadshows into actual foreign direct investments are cited as downsides affecting the Philippine economy​​.

Conclusion
The BSP is recommended to continue its hawkish approach in response to above-target inflation forecasts and economic growth challenges. This stance is crucial to stabilize the economy and manage inflation expectations effectively in the coming years.