BSP signals rate cuts still distant amid high inflation
Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said on Tuesday that the economy may have begun recovering in the third quarter, but noted that interest rate cuts could still be some way off as inflation is expected to remain elevated.
Remolona said gross domestic product (GDP) growth in the third quarter may have accelerated from the sluggish 2.3 percent expansion in the second quarter, citing the government’s efforts to ramp up spending.
Still, the BSP chief said it was too early to tell when the central bank could begin reversing its rate hikes, noting that inflation typically takes time to respond to tighter monetary policy.
Remolona said the BSP considers economic growth alongside inflation when setting monetary policy, adding that further rate increases would be less likely if the gap between actual output and the economy’s potential output widened.
“Our policy is forward-looking,” he told reporters on the sidelines of an event hosted by the European Chamber of Commerce of the Philippines.
“We’re estimating if the policy is already appropriate [and] if inflation would sustain its downtrend. So, we won’t tighten further,” he added.
Last month, a “strong majority” of the BSP’s Monetary Board decided to raise the policy rate by half a percentage point to 5.5 percent, citing the need for a stronger response to stubbornly high inflation. The move marked the fourth rate hike this year, bringing the cumulative increases since April to 125 basis points.
Above target
The BSP expects inflation to average 6.1 percent this year, considerably above its 3-percent target. It further raised its inflation forecast for 2027 to 6 percent from 5.4 percent, though it expects price growth to ease to 3.3 percent in 2028.
Remolona has said policymakers were concerned about elevated oil prices, the risk of sharp wage increases and potential food supply disruptions stemming from the ongoing El Niño episode.
A weak peso was another concern, he said, as a sharp depreciation could add to inflationary pressures.
The BSP expects growth could recover by the first quarter of 2027. The Philippine economy expanded by just 2.6 percent in the first half of this year, weighed down by a major corruption scandal and a war-driven surge in prices.
In its latest “The Market Call” report, economists at University of Asia and the Pacific said they expect growth in the third quarter to remain subdued at around 2 percent on the back of sticky oil prices and slow government spending.
“Growth may pick up in fourth quarter of this year onwards,” they said. “The BSP’s hawkish inflation stance with El Niño in mind may lead to another likely 25 basis points hike in December, with our average inflation estimates nearing 8 percent for the fourth quarter.”
