He said there is a chance that starting September, the country may see the inflation rate fall closer to this year’s target of 4.6 percent.
This could translate to a decrease in the debt-to-GDP ratio, which stands at 61 percent, a slight drop from 63 percent in 2022.
The country’s debt reached a fresh record high of P13.856 trillion at the end of March this year.
Low inflation can contribute to economic growth in the long term as it promotes stability and confidence, thereby encouraging investment.
“In reality, inflation is higher than the interest policy rate. Right now it’s not as contractionary as it is. However, to the extent that we believe our forecast is correct, the inflation is falling rapidly,” said Medalla in a press conference during the Bangko Sentral ng Pilipinas (BSP)-International Monetary Fund (IMF) Conference on Financial Stability held at Mactan, Cebu.
The country’s inflation rate came in at 6.6 percent in April, a deceleration from the inflation rate of 8.6 percent in February and 7.6 percent in March.
The BSP’s key policy rate, on the other hand, is at 6.25 percent, after nine successive interest rate hikes since May 2022 intended to rein in inflation that has reached 14-year highs following Russia’s invasion of Ukraine in February 2022 that has disrupted global supply chains.
The governor noted that the decline in the inflation rate can be attributed to the government’s relaxing of importation, which he said is now weighted in favor of inflation instead of the “tremendous pressure to do something for the farmers.”
“But right now, I think the government has made the right choice,” he added.
Should the current trend continue, he expects headline inflation, or the consolidated inflation figures within the economy including commodities like energy, food and beverage, to improve by the last quarter.
“Of course, we cannot be complacent. Anything can happen. We are optimistic that this year is good,” he said.
However, he warns that 2024 may not be as good as 2023, at least relative to the high GDP growth rate this year.
“So, even if the latest growth rate is higher, the large base will prevent, will make it harder to grow by the same rate next year,” said Medalla.
GDP growth came in at 6.4 percent in the first quarter of 2023, the Philippine Statistics Authority said.
Medalla said regulators should strike a balance between establishing strong financial institutions while encouraging innovation in the design of tools that would have the requisite safeguards to build in resilience, the formula to a crisis-proof system.
Systemic risks
The BSP-IMF Conference on Financial Stability gathered at least 142 delegates — from 14 central banks and financial authorities from the region, six regional and global organizations, and 31 organizations from the private sector.
The theme of the conference — “The New Frontier of Financial Stability: Global Problems, Global Solutions, Local Challenges” — suggested that global developments invariably spill over to various jurisdictions.
The participants of the conference then looked at how Asia can find a collective solution.
BSP Governor Medalla highlighted lessons learned during past crises, namely the building up of strategic foreign exchange reserves and enhancing rules on bank capitalization, liquidity, and risk management.
“It’s finding the middle [where] there’s enough creativity [encouraged] but without thinking in terms of the public cost of mistakes,” Medalla said during his keynote address.
IMF Asia and Pacific Department Division chief Dr. Thomas Helbling said the conference allows an exchange of best practices among regions to tackle financial systemic risks.
“We can always learn. There’s an important element of cooperation and thinking ahead of new risks and challenges… So far, Asia has withstood the volatility and turbulences in the global financial markets after banking issues in the United States,” he said at the press conference.
Fiscal authorities said during the Financial Stability Conference that economic growth will drive down the current high rates including inflation, debt-to-GDP ratio, and interest rates.
“If the economy grows, this will solve most of the problems,” said Medalla.
Cebu’s strength
Bank of the Philippine Islands lead economist Emilio Neri Jr. said for Cebu, construction is getting stronger as well as the hotel, restaurant and resort sectors.
“The hard contact sectors are starting to catch up. But of course, there are new sectors like energy. Because the economy is growing rapidly, the population requires more energy, utilities and logistics,” said Neri.
He notes that the tourism sector, which includes hotels, resorts and restaurants in Cebu, has rapidly bounced back since the economy reopened with the lifting of Covid-19 related restrictions, causing a sudden rise in employment and opportunities for the public as well.
In turn, these economic movements will translate into economic growth and will reflect eventually in the fiscal numbers.