BSP faces pressure to pause hikes as growth slumps

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) is now facing pressure to pause its tightening cycle as growth slowed for a fifth straight quarter, economists said, adding there is narrowing room for rate hikes in its inflation fight.

In a Nov. 9 report, Capital Economics Senior Asia Economist Gareth Leather said the fresh inflation peak in October could pressure the BSP to hike anew, but the continuing growth slump in the third quarter will likely warrant a pause.   

Mr. Leather noted that the headline and core inflation last month “has put increased pressure on the central bank to hike rates again at its final meeting of the year in December.”

“However, the weakness of the economy could give the central bank second thoughts, and on balance we expect a hold,” he added.   

Gross domestic product (GDP) growth slowed for a fifth straight quarter in the July-to-September period, as weak household consumption, agricultural output and investments dampened domestic activity. 

The 2.1% GDP growth in the third quarter is the slowest since the 3.8% decline in the first quarter of 2021. It also marked the economy’s worst performance (excluding the pandemic) in nearly 17 years or since it expanded by 1.8% in the fourth quarter of 2009.

This brought the year-to-date GDP growth to 2.5%, undershooting the government’s full-year target of 3.5%-4.5%.

According to Mr. Leather, the slowdown reflected the drags of heated inflation and higher interest rates on consumer spending. 

“The weakness of the economy supports our view that the central bank’s tightening cycle is now probably over despite the recent jump in inflation,” he added.

Pantheon Macroeconomics also said a December rate hold may be on the table following the dismal third-quarter growth reading, although it noted that inflation would have to sharply decelerate to guarantee it.   

“We still see a pathway for a rate pause in December given this GDP (gross domestic product) disappointment, though it would necessitate November CPI (consumer price index) coming in very soft relative to expectations,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said in a report on Tuesday.

The United Kingdom-based think tank slashed its GDP growth forecasts to 2.4% from 2.8% for this year, and to 3% from 4% for 2027. 

Earlier this month, BSP Governor Eli M. Remolona, Jr. said a wider negative output gap would make the case for additional rate hikes less likely.

According to the BSP, the output gap is a summary indicator of the relative demand and supply conditions in the economy, which it uses to assess the degree of demand-based inflation pressure.

An economy posts a negative output gap when its actual output is less than its full potential.

The BSP has said that the economy could recover by the last quarter of the year or first quarter of 2027 as the government accelerates spending.

The central bank began its tightening cycle in April after the Middle East war-driven energy shocks stoked inflation faster than they had anticipated.

At its Oct. 22 meeting, the Monetary Board delivered a larger-than-expected 50-basis-point (bp) hike to bring its key policy rate to a nearly two-year high of 5.5%. It has so far raised benchmark borrowing costs by a cumulative 125 bps. 

SOME TIGHTENING ROOM LEFT
For other analysts, however, there might still be some room left to tighten the policy rate as the economy regains its footing in the fourth quarter even as inflation stays elevated.

In a report on Tuesday, the Bank of America (BofA) said the Philippine economy could rebound to 2.6% in the last quarter of the year as global crude oil price falls. 

“We still see GDP recovering to 2.6% in 4Q26 (fourth quarter of 2026), and 3.5% in 2027. The gentle growth recovery is rooted in the view that the import prices of crude declines further, noting that the Philippines may be the most exposed to crude oil supply from the Middle East,” Jojo Gonzales, a research analyst at BofA’s research partner Philippine Equity Partners, said. 

However, the country’s vulnerability to oil import shocks could keep inflation well above the BSP’s 4% ceiling at 6% by end-2026 and 5.2% by end-2027, Mr. Gonzales noted.

“In this context, we do not think the soft GDP print in 3Q (third quarter) alters the path of monetary policy as the Bangko Sentral ng Pilipinas is focused on inflation, rather than growth of the peso-dollar rate,” he said.

“We continue to expect the BSP to raise its policy rate by 25 bps in December 2026 and 25 bps more in February 2027, to take the policy rate to 6%,” he added.

On the other hand, HSBC Global Investment Research maintained its forecast that the BSP will deliver its final quarter-point hike in December, noting that the growth slowdown only reduced the odds of a jumbo move.

“Will this downside surprise stop the Bangko Sentral ng Pilipinas from hiking rates? We don’t think so,” HSBC Senior ASEAN Economist Aris D. Dacanay said in a separate Nov. 9 report.

“Apart from high inflation, the latest data show that wage growth continues to run at more-or-less the same pace as inflation — necessitating a monetary response even amid slow growth. Instead, we think 3Q GDP substantially reduces the probability of a jumbo 50-bp hike.”

For Mr. Dacanay, the BSP will likely shift its focus on supporting economic growth once pressures from the El Niño and oil prices fade next year.

Earlier, Mr. Remolona said the BSP remains on a tightening path as inflation may still take a few months to peak, with the headline print likewise expected to hold above target over the next two years. 

High energy prices spilling over to the cost of oil, transport, and utilities drove headline inflation to 7.8% in October, the fastest pace in almost four years. As of October, headline inflation stood at 5.6%. 

The BSP projects inflation to accelerate to 6.1% this year from 1.7% in 2025. It sees the headline print easing slightly to 6% next year before recovering to 3.3% in 2028.