Remolona: PH economy can take fresh rate hike

MANILA, Philippines – The Philippine economy remains resilient enough to absorb another modest interest rate increase, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said, noting that borrowing costs are still relatively low in real terms even after the central bank’s tightening campaign to rein in inflation.

Speaking to reporters on Monday, Remolona said real interest rates—the actual cost of borrowing after adjusting for inflation—remain negative even after policymakers raised the benchmark rate to 4.75 percent.

READ: BSP hikes policy rate by 25 bps to 4.75%

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As a result, he said, the economy could still withstand another quarter-point increase, though he declined to say how many additional modest hikes would be appropriate.

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Remolona said that outlook assumes government spending rebounds in the second half of the year after a weak start, helping drive faster economic growth.

Public expenditures slowed earlier this year amid the fallout from a corruption scandal that weighed on confidence and disrupted the rollout of government projects.

“The problem is the lack of government spending,” the central bank chief said, adding that he expects expenditures to catch up.

“So, we expect to recover strongly in the second half of the year,” he added.

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The BSP last month raised its benchmark interest rate by 25 basis points (bps), bringing cumulative increases in the current tightening cycle to 50 bps, as policymakers sought to contain inflationary pressures stemming from the conflict in the Middle East and the threat of a severe El Niño.

Higher borrowing costs are designed to curb spending by households and businesses, helping ease inflation but also slowing economic activity. The Philippine economy grew 2.8 percent in the first quarter, its weakest pace since the postpandemic recovery began, as the corruption scandal undermined confidence while higher global oil prices squeezed consumers and businesses.

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READ: PH gov’t debt servicing rose anew in May

In a note to clients, economists at MUFG Bank Ltd. said they expect inflation in the Philippines to remain elevated at more than 6 percent. With risks of El Niño and food price pressures moving forward, the bank sees the BSP remaining hawkish for now.

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“We are forecasting BSP to hike rates two times more, bringing the policy rate to 5.25 percent by the end of 2026, which should over time provide some support for the currency,” MUFG said. INQ