DESPITE the slower-than-expected performance of the Philippine economy in the second quarter, international and local observers said the Bangko Sentral ng Pilipinas (BSP) is likely to continue its monetary policy normalization by raising interest rates.

The slower growth of 7.4 percent in April to June 2022 “won’t deter” the country’s monetary authorities from raising the central bank’s policy rates on Thursday of the following week, research firm ANZ Research said in a report.

It believes inflation, which jumped to a record three-year high of 6.4 percent in July, poses a risk to domestic growth as producers pass higher costs on to consumers.

In fact, ANZ Research said the momentum in private consumption will be difficult to maintain in the second half of 2022 as households will be forced to reassess their spending choices due to the growing cost of living.

“Moreover, the favorable base effects will also start to fizzle out.

That is why we believe inflation, rather than headline GDP (gross domestic product) growth, is the policy priority for the near term,” it added.

The Bangko Sentral still has the option to raise interest rates further, Bank of the Philippine Islands (BPI), for its part, said, to prevent the pass-through effects of a sharp depreciation of the peso from further dampening demand.

It also said despite the aggressive hikes, interest rates are still historically low and accommodating, and analysts believe the economy was strong enough to withstand further rate increases.

“A prolonged period of high inflation will eventually hurt consumers, which will likely affect the economy more severely compared to higher interest rates. We expect a 100-bp (basis point) rate hike from now until the end of the year, which will bring the policy rate to 4.25 percent,” BPI emphasized.

Meanwhile, the second quarter’s GDP result, United Kingdom (UK)-based Oxford Economics stressed, “raises the risk that the BSP opts to raise rates by a smaller 25 bps (basis points) instead of 50 bps that we expect at the August meeting.”

In the meantime, another UKbased research consultancy firm said the central bank faces a challenge as a result of the economic slowdown.

“We think the drop in growth last quarter will be enough to tip the central bank to slow the pace of its tightening and have penciled in a 25-bp hike,” Gareth Leather, economist at Capital Economics, said.

Japan-based financial institution Nomura, on the other hand, said it anticipates core inflation to climb, along with some indications of second-round impacts and a higher demand for wage hikes.

“Because of our forecast that CPI (consumer price index) inflation will stay above 6 percent before peaking by fourth quarter, we expect BSP to follow up with a 50-bp hike at its next meeting this month, followed by three more 25-bp hikes, taking the policy rate to 4.50 percent (versus our previous forecast of 3.75 percent),” it underscored.

Lastly, Moody’s Analytics sees the Philippines having challenges in the future, including pressures on inflation, sluggish growth and a challenging labor market.

“What is more, the Bangko Sentral ng Pilipinas is expected to put forward another rate hike in August, albeit a smaller one than July’s 75-basis-point hike,” it added.

BSP Governor Felipe Medalla hinted last week that the central bank might increase interest rates aggressively once more next week.

The central bank’s overnight borrowing, deposit and lending rates currently stand at 3.25 percent, 2.75 percent and 3.75 percent, respectively.