Think tank sees PHL raising rates further by 50 bps


THE Philippines could further increase its interest rates by 50 basis points to keep up with the anticipated strengthening of the US dollar, according to a UK-based think tank.

Oxford Economics made the forecast as it projected that most economies in the Asia-Pacific region, including the Philippines, would experience a slowdown this year due to dampened business investments as a result of weaker global trade and high interest rates.

“Most of the region’s economies will experience a marked slowdown in 2023, with China, Hong Kong and Thailand the only likely exceptions,” Oxford Economics said in its outlook report released on Thursday.

“Indeed, in many, a sharp deterioration was already evident at the end of 2022; of the nine economies that report seasonally adjusted real GDP, four showed a [quarter-on-quarter] fall in Q4, while several others made only the smallest of gains,” it added.

Oxford Economics said the weakness in economic expansion in the fourth quarter would continue to linger this year as “impetus“ from economic reopening has “faded” with real income and spending growth of consumers being “limited by relatively high inflation.”

“The weakness in Q4 was largely driven by a sudden drop in global trade. China reopening and the most aggressive phase of the global IT downturn probably being behind us may result in less extreme pressure in early 2023,” it said.

Oxford Economics also noted that Asian central banks would also be forced to further hike their interest rates to keep up with the strengthening of the US dollar.

“Meanwhile, the US economy started 2023 surprisingly strongly and the Fed will need to raise interest rates beyond 5 percent to ensure sufficient disinflation in the medium term,” it said.

“This suggests that the period of weak external demand for Asian exporters will drag on for longer. It also risks pushing some Asian central banks to hike interest rates further if the US$ strengthens a lot,” it added.

Oxford Economics said it expects the Philippines to raise interest rates by a further 50 basis points, while noting that the country’s inflation rate is one of the highest in the Asia-Pacific region.

The Philippines’s inflation rate accelerated to a 14-year high of 8.7 percent in January; and the central bank said February’s inflation may breach 9 percent.

Last month, the Monetary Board raised interest rates by 50 basis points, effectively increasing overnight reverse repurchase facility rates to 6 percent.

Oxford Economics said Asian exports could be “depressed” throughout most of 2023 because of the “weak outlook for global trade,” which shall also “curb business investment” that is already “under pressure from higher interest rates.”

Nonetheless, Oxford Economics said it expects a “fairly general disinflationary trend” this year across the Asia-Pacific region.

“Commodity prices are well down on their 2022 peaks, exchange rates are not as fragile as in 2022, pressures in global supply chains have eased significantly and inflation expectations have stayed low, contained by tightening policy or spare capacity,” it said.

Image credits: Patrick Roque via Wikimedia Commons CC BY-SA 4.0