By means of Luisa Maria Jacinta C. Jocson, News reporter
METROPOLITAN Bank & Trust Co. (Metrobank) Research lowered its gross domestic product (GDP) forecast for the Philippines this year as high interest rates continue to constrain domestic demand.
“We continue to believe that the country’s economic growth should remain robust, albeit at a moderate pace, as investment momentum remains limited by tight monetary policy, making it more difficult for businesses to invest and expand,” it said report.
Metrobank Research expects the economy to grow 5.7% this year, lower than the previous forecast of 6%.
If achieved, this would fall short of the government’s growth target of 6-7% this year, but slightly faster than GDP growth of 5.5% in 2023.
Metrobank noted that “additional efforts” would be needed to achieve the government’s target.
In the first quarter, GDP grew by 5.7%. Second quarter GDP data will be released on August 8.
Metrobank also noted that many Filipinos are not spending as much as before due to higher borrowing costs.
“Some households have also incurred more debt. Despite these challenges, the economy continues to progress, just at a more moderate pace than initially hoped,” the report said.
In June, the Bangko Sentral ng Pilipinas (BSP) kept its key interest rate stable at 6.5%, the highest level in more than seventeen years.
The Monetary Board has increased borrowing costs by a total of 450 basis points (bps) between May 2022 and October 2023.
By 2025, economic growth is expected to average 6%. This would also miss the government’s target of 6.5-7.5%.
Meanwhile, Metrobank Research said it expectsFto remain within the 2-4% target of the BSP this year and in 2025.
“The price of rice, which has been a major reason for rising costs in the Philippines, is expected to decline. This should help keep overall prices more stable. We agree with the BSP that inFThis year and next, inflation will remain within acceptable levels.”
It looks good for this yearFan average of 3.3% and 3.1% in 2025, in line with the BSP’s baseline forecasts.
Headline inflation fell to 3.7% in June, marking the seventh consecutive month in which inflation was within the BSP’s target range of 2-4%.
Rice in itFInflation fell from 23% a month ago to 22.5% in June. This marked the third straight month of slower rice in itFlat.
“However, some challenges lie ahead. A strong La Niña weather event could impact crop production and prices,” Metrobank Research said.
“Geopolitical events can also impact supply chains and push prices up. While the future appears promising for stable prices, our outlook may change.”
Meanwhile, Metrobank Research expects the central bank may make up to three interest rate cuts this year.
“We believe the BSP can cut rates twice this year, with a possible third cut in December if prices remain stable FFinancial markets remain calm,” the report said.
BSP Governor Eli M. Remolona Jr. has previously indicated that they are on track to begin policy easing in August. He previously said the central bank could cut by up to 50 basis points this year.
If the BSP cuts rates in August, this would be the case FFirst interest rate cut since November 2020.
“However, these decisions also depend on what the US Federal Reserve does with its own interest rates. The BSP will keep a close eye on how quickly the US cuts interest ratesFimpact the Philippine economy and the value of the peso,” the report said.
According to the report, the peso will also rebound by the end of the year and stand at around P57.20 against the dollar.
The Development Budget Coordination Committee expects the peso to fluctuate between P56 and P58 per dollar this year.
The peso closed at P58.35 per dollar on Friday, up 8.5 centavos from its P58.435 Fready on Tuesday.
In May, the local currency fell to the level of P58 per dollar for the first time since November 2022.
“The strength of the US dollar is expected to weaken as the Fed cuts interest rates. Meanwhile, the Philippine central bank is also likely to cut interest rates, which could increase imports as the economy grows,” Metrobank Research said.
Markets are currently pricing in a near certainty that the Fed will start cutting rates at its September meeting and expect a total rate cut of 66 basis points by the end of the year, according to CME’s FedWatch Tool, Reuters reports .
“Looking ahead, a broader current account, where the Philippines buys more from other countries than it sells, could also provide a new foundation for the peso’s value,” Metrobank said.