Slow GDP growth tests BSP resolve on inflation

INEQUALITY Informal settlers' shanties in Pasay City set against the skyscrapers of the Makati Central Business District provide a stark view of the widening economic and social inequality even as the Philippines was recently upgraded by the World Bank as an upper-middle-income economy.

The Bangko Sentral ng Pilipinas (BSP) acknowledged that the country was grappling with a difficult mix of high inflation and sluggish economic growth, while stressing that its future policy decisions would remain guided by incoming data.

In a statement on Wednesday evening, the central bank said it remained committed to fulfilling its mandate of maintaining price stability in a way that supports sustained and balanced economic growth.

The BSP described the prevailing situation as “a difficult combination of elevated inflation and slowing economic growth.”

It stopped short, however, of using the term “stagflation,” which economists have increasingly used to characterize the country’s economic predicament.

“Since monetary policy is unable to control the direct inflationary effect of recent global supply shocks, it focuses on the second-round effects of such shocks,” the central bank said.

“In the BSP’s efforts to bring inflation down, it takes important account of the weakness in aggregate demand,” it added. “It is also mindful of the need to prevent the de-anchoring of inflation expectations.”

Data released earlier this week showed that gross domestic product (GDP) grew by just 2.1 percent in the third quarter, its weakest expansion in more than 16 years outside the pandemic period.

Weak household spending and investment, weighed down by elevated inflation, continued to drag on economic activity.

Policymakers have acknowledged that meeting even the lower end of the government’s 3.5-percent to 4.5-percent growth target for 2026 would be a formidable challenge.

The arrival of disappointing growth numbers has fueled calls for the BSP to temper its pace of monetary tightening.

Last month, the central bank raised its policy rate by 50 basis points to 5.5 percent in an aggressive move to rein in inflation.

Governor Eli Remolona Jr. has said the BSP would raise interest rates as much as necessary to bring inflation under control.

He has also indicated, however, that further tightening would become less likely if the gap between the economy’s actual and potential growth continued to widen.

For the BSP, restoring price stability and safeguarding households’ purchasing power are essential to rebuilding confidence and supporting a durable economic recovery.

“We are carefully assessing the implications of the latest growth data for the inflation outlook,” the central bank said.

“The BSP will ensure that monetary policy settings remain appropriate and consistent with its mandate of promoting price stability conducive to sustainable economic growth,” it added.