MANILA, Philippines – Philippine economic growth may slowdown due to the expected increase in interest rates resulting from the US Federal Reserve action to put an end to five years of massive bond buying, International Monetary Fund (IFM) resident representative Shanaka Jayanath Peiris said yesterday.
Peiris said that when the US Fed finally ends its monthly asset purchases, interest rates will eventually go up, putting pressure on emerging market rates.
“The pressure for rates to rise including in the Philippines is probably there and will get more clear and immediate through time,” Peiris said.
The Fed, in its latest meeting last week slashed its massive monthly asset purchases by another $10 billion to $45 billion. The Fed in January started scaling down its purchases of US Treasuries and mortgage bonds amid an improving US economy.
“The appropriate case for the Philippines is for interest rates to move up and also for the private sector to adjust to that and the implication is that leverage and growth might slow a bit,” Peiris said.
Higher interest rates typically dampens economic growth as consumers have less incentives to borrow and this may slow down domestic consumption or even halt business expansion plans, for example.
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The Bangko Sentral ng Pilipinas in early March took a hawkish tone after US Fed Chairman Janet Yellen hinted interest rates may start increasing as early as this year.
But the BSP, in its last policy meeting on March 27, kept key rates steady although it hiked the banks’ reserve requirement ratio to mop up liquidity.
The BSP will revisit policy settings on May 8.
