MANILA, Philippines – The rebound in government spending in April could give the Bangko Sentral ng Pilipinas (BSP) more room to raise interest rates to combat war-driven inflation without placing too much strain on economic growth, according to Nomura Global Markets Research.
In a research note, Nomura said there’s now “light at the end of the tunnel” after the sharp fiscal tightening seen following a confidence shock triggered by a major corruption scandal.
“On monetary policy, this allows BSP to focus on containing inflation risks,” the bank said, adding that it still forecasts the BSP to hike by another 75 basis points this year to 5.25 percent, starting with a quarter-point increase at its next meeting in June.
Latest data from the Bureau of the Treasury showed that government expenditures had grown by 11.14 percent to P505.4 billion in April, outpacing the modest 2.83-percent growth in revenues to P536.8 billion.
Primary expenditures contributed 87.43 percent, or P441.9 billion, of total spending in April, 8.22-percent higher compared with a year ago.
That yielded a budget surplus of P31.4 billion during the month, trimming the four-month fiscal deficit by 14 percent year-on-year to P324.1 billion.
“This improvement tracks the previous episode of severe fiscal contraction in 2011, which we called the ‘bad scenario’ to which today’s episode will be comparable,” Nomura said. “Using the same playbook, the rise in non-interest expenditure growth is likely to continue, helped in part by the government’s catch-up spending plans.”
BSP Governor Eli Remolona Jr. earlier said that a meaningful rebound in government spending could help offset the drag on growth from tighter monetary policy.
Last week, Remolona said the May inflation data due June 5 would be a key input for the Monetary Board’s next policy decision. He added that “it’s a toss-up whether we do an off-cycle [rate hike] or we just wait for the regular meeting, which is not that far away anyway.”
Already, consumer prices rose 7.2 percent from a year earlier in April, the fastest pace in three years, as higher energy costs tied to the Middle East conflict quickly spilled over to other household essentials.
The April surge marked the second straight month inflation breached the central bank’s 2-percent to 4-percent target range. In response, the Philippine central bank raised its key policy rate by a quarter point to 4.5 percent at its April 23 meeting amid a “deteriorating” inflation outlook.
