August 8, 2019

PH Economy Slows in Q2: Rate Cut versus Inflation

City Buildings during Orange Sunset by Luis Enrique Carvajal.

Philippines Q2/2019 GDP growth registered at 5.5%, lower compared to previous year’s 6.2%. It was already seen that the delayed in government spending, due to delayed passage of P3.7 trillion 2019 budget, would have an effect on the said growth. Also, the Contractionary Monetary Policy (lowering of money supply) last year is seen to affect the growth number as well. The eagerness of the government to tame inflation, by increasing the interest rate, could have tamed the economic growth in effect; but on the positive note, inflation has significantly declined on average from 5.13% in 2018 to 3.40% in 2019. Now that the growth number seems out of projection, the central bank (BSP) might cut the interest rate, to boost the money supply, in order to stimulate the economy. But this could be a double edge sword scenario - unwarranted economic stimulation could push price up which is not good for the economy. 

I think it is very important for central bank to consider the price of basic goods before it acts on the rate cut, especially today that we are in midst of typhoon season, where supply of some agriculture products might decline – which could result for prices to go up. Increasing the money supply while the supplies of goods are declining could back fire on inflation.

If there is something to be monitored, I think that is the timeline of government projects from conceptualization to implementation stage. Good execution of Expansionary Fiscal Policy could boost the economic growth. 

It is noteworthy to mention as well, that it is vital for government to encourage investments in agriculture sector since it is the backbone of our economy; if we have abundant supply of agriculture products, there would be less pressure on prices when money supply is increased. In addition, increasing the supply of energy, by building renewable energy plants, would lower the cost of energy and would serve as a balancing agent in times of inflationary pressures.

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