Philippines Central Bank Expected to Raise Interest Rates Despite Economic Slowdown

The Bangko Sentral ng Pilipinas (BSP) could deliver an additional 50 basis points (bps) in rate hikes this year, according to forecasts from Oxford Economics and Citi Philippines. This potential increase comes despite a weak economic growth outlook, with the country's gross domestic product (GDP) growing by only 2.3% in the second quarter, the lowest rate since the pandemic.

Oxford Economics, in a report dated August 11, indicated that the BSP could implement an additional 50 basis points (bps) in rate hikes this year, driven by the Philippines' high vulnerability to inflation risks. Lead Economist Maya Senussi stated that the Philippines remains the most exposed to inflation risks and they expect another cumulative 50 bps worth of tightening despite soft growth prospects. This sentiment is echoed by Citi, which also forecasts two more 25-bp hikes in August and October, highlighting that the current rate of 4.75% is inadequate given the inflation outlook.

“The Philippines remains the most exposed to inflation risks and we expect another cumulative 50 bps worth of tightening despite soft growth prospects.”Maya Senussi, Lead Economist, Oxford Economics

BSP Governor Eli M. Remolona Jr. acknowledged the sluggish growth, noting that the economy is experiencing a negative output gap, where actual output is less than its potential. The unemployment rate has also risen to 4.9% in June, translating to approximately 2.59 million jobless Filipinos, as household spending has been adversely affected by rising consumer prices.

Despite these challenges, Citi noted that exports of goods and services contributed positively to the economy, with total exports growing by 13.09% year-on-year to $46.72 billion as of June. However, analysts caution that this uptick is insufficient to significantly bolster overall economic growth. Senussi remarked that the Philippines has also benefited through stronger exports, although its concentration in testing, assembly, and packaging likely will generate more limited domestic spillovers.

“The policy rate at 4.75 percent seems at a too-thin margin over BSP’s 2027 inflation forecast of 4.5 percent.”Citi Philippines

The De La Salle University’s Angelo King Institute for Economics and Business Studies emphasized the need for a measured approach to oil price shocks. Researchers advised against panic tightening or open-ended subsidies, advocating instead for a calibrated mix of credible monetary policy and targeted relief measures. They warned that misinterpreting a supply shock as a demand shock could lead to detrimental economic consequences.

“This calls for a more careful response: not panic tightening or open-ended subsidies, but a calibrated mix of credible monetary policy, targeted relief, transparent fuel markets, supply buffers, and faster energy diversification.”DLSU-AKI Researchers

As the BSP prepares for its next monetary policy meeting on August 27, it remains focused on balancing inflation control with the need to support economic growth. The central bank has already implemented two rate hikes this year, totaling 50 bps, as it strives to bring inflation closer to its target range of 2% to 4%. While inflation has shown signs of easing, dropping to 6.2% in July from a peak of 7.2% in April, it remains above the BSP's expectations.

Looking ahead, Citi maintains its full-year GDP growth forecast for the Philippines at 3.2%, which is below the government's target range of 3.5% to 4.5%. Analysts caution that potential risks, such as subdued remittance inflows from the Middle East and the anticipated El Niño phenomenon, could further complicate the economic landscape.