Against the backdrop of elevated uncertainty in the global economic output, the International Monetary Fund said policies of emerging and developing countries, like the Philippines, need to rein in short-term risks and rebuild buffers while pushing ahead efforts to lift medium-term growth prospects.
“Monetary policy should ensure that price stability is restored while supporting activity and employment,” IMF said in its latest World Economic Outlook where the global output forecast was raised by 0.1 percent for this year. Global growth is expected to remain stable at 3.3 percent in both 2025 and 2026.
Forecasts for the Philippines for this year and next were retained at 6.1 percent and 6.3 percent, respectively. The government’s target growth range for this year up to 2028, meanwhile, was recently revised to between 6 and 8 percent.
IMF said that in economies in which inflationary pressures are proving persistent and the risk of upside surprises is on the rise, “a restrictive stance will need to be maintained until evidence is clearer that the underlying inflation is sustainably returning to target.”
In economies in which activity is cooling fast and inflation is on track to durably go back to target, IMF said a less restrictive stance is justified.
At last year’s conclusion of the Article IV Consultation on the Philippines, IMF said the Bangko Sentral ng Pilipinas “has room to ease the policy rate gradually towards a neutral stance.”
“With inflation and inflation expectations returning towards target and the output gap turning negative, a continued gradual reduction in the policy rate is appropriate,” IMF said.
As inflation entered back to the government’s target range for the first time in 4 years, the BSP earlier said there is still enough room to ease the country’s monetary policy stance.
The policymaking Monetary Board last month reduced the BSP’s Target Reverse Repurchase (RRP) Rate by another 25 basis points bringing it to 5.75 percent. This was the third consecutive 25bps-rate cut made by the Monetary Board for last year, totalling 75bps.
This as full-year inflation averaged to 3.2 percent, the slowest since 2021 and at the mid-range of the government’s target range of between 2 and 4 percent.
The BSP has also said that there is still room to ease as the rates are still in restrictive territory compared to what the central bank thinks the ideal rate is.
IMF said a datadependent approach and careful communication will be important to manage expectations amid uncertainty and more frequent supply-side shocks.
“Growth is expected to accelerate in 2024-25, supported by disinflation, and gradually declining borrowing costs as monetary policy normalizes. Inflation is projected to decline to 3.2 percent on average in 2024 from 6.0 percent in 2023, supported by the reduction in rice tariffs and other nonmonetary measures to reduce food prices,” IMF said.
“Growth is expected to pick up modestly in 2024-25 while inflation should remain within the central bank’s target range,” IMF said, adding that growth will be supported by an acceleration in consumption as food prices ease and by an increase in investment sustained by continued emphasis on public investment and more accommodative financial conditions.
“Risks to the near-term growth outlook are tilted to the downside, including external risks such as recurrent commodity price volatility and escalation of geopolitical tensions, and domestic risks related to lower-than-expected payoffs from reforms. New supply shocks and recurring commodity price volatility represent upside inflation risks,” IMF added.
Reacting on the latest WEO, Michael Ricafort, RCBC chief economist, said the Philippines is one of the fastest growing economies in Asean and “more structural reforms are needed to make economic growth and development more sustainable, inclusive for the long-term and for the coming generations.”
“Better and more infrastructure spending to further sustain economic growth and development, as this would attract more foreign investments and tourists that create more jobs and other economic opportunities in the country,” Ricafort said.
Ricafort said the country needs “an effective monetary policy that ensures price stability, alongside non-monetary measures to boost local productivity of agricultural and manufacturing through the use of the best global technologies to increase local output and bring down prices.”
He sees inflation averaging between 3.0-3.5 percent this year which will allow the BSP to further reduce the key rates to between 5.00-5.25 percent.
“Inflation for December was the fastest in 4 months but still among the slowest in more than 4 years largely due to higher transport and utility prices, also partly due to the seasonal increase in demand during the Christmas and New Year holiday season,” Ricafort said.
“Relatively benign inflation at 2 percent levels is still possible up to early 2025, within the BSP’s inflation target of 2 percent-4 percent, thereby could justify future local policy rate cuts,” he added.
“Still relatively higher local policy rates led to some net increase in borrowing costs since 2022 that could lead to lower earnings and valuations, as well as could be a drag on economic growth as an unintended consequence in the quest to fight off inflationary pressures,” Ricafort said.