Diokno: The economy can absorb a sudden increase in interest rates
MANILA, Philippines — The Philippine economy is in good enough shape to withstand the central bank’s massive surprise rate hike and continue to grow within target this year, even amid inflationary concerns, according to the secretary. at Finance Benjamin Diokno.
Diokno said the economy is robust enough to absorb the 75 basis point hike in the policy rate by the Bangko Sentral ng Pilipinas (BSP) as part of measures to tackle high inflation and the continued depreciation of the peso.
He noted that the expansion of economic activities in the country remains favorable. Gross domestic product (GDP) grew stronger than expected in the first quarter and a positive second quarter is already in sight.
The finance chief noted that the GDP growth target of 6.5-7.5% for 2022 remains within reach even with the sudden rate adjustment.
“The DBCC (Development Budget Coordination Committee) target range for the GDP growth rate was set to accommodate the different paces of monetary policy normalization by the BSP,” Diokno told reporters yesterday.
The latest interest rate increase comes after back-to-back increases in May and June, bringing the key rate back to its March 2020 level of 3.25%.
The Monetary Council is not due to meet until August 18, when a 50 basis point rate hike is expected to be announced.
“Growth prospects are seen as supported by the continued eased quarantine restrictions as well as the positive impact of structural reforms,” he said.
Among these reforms are the Law on Business Recovery and Tax Incentives for Businesses, the Law on the Strategic Transfer of Financial Institutions, the Law on Civil Service, the Law on Rice Pricing and the Law on Foreign Investments. .
Diokno argued that the economy was growing at the same rate before the pandemic, when the key rate was 4%.
He estimates that the economy will return to pre-COVID levels by the middle or third quarter of 2022 at the latest.
“BSP just sped up the standardization process,” Diokno said.
He stressed that the national government would continue to adopt a gradual and calibrated path of fiscal consolidation to help preserve the strong growth momentum.
Diokno has not yet provided a full fiscal consolidation plan except for a few tax measures including those on online transactions and single-use plastic.
A fiscal consolidation plan, supposed to cover higher or additional taxes, is needed to pay off the debts that have accumulated due to the pandemic. It also aims to reduce the share of national debt in the country’s output and not jeopardize the credit rating of the Philippines.
But Diokno argued that the debt-to-GDP ratio is not the only important criterion, as the country’s economic fundamentals must also be taken into account.
With that, Diokno said the Philippines continues to do well as fiscal and monetary authorities are in control.
“The debt to GDP ratio is manageable. The banking system is sound and more than adequately capitalized. The banking sector has built enough buffers. Our external sector remains robust: gross international reserves are more than sufficient and there is a steady structural inflow of foreign currency,” Diokno said.