BSP signals lower odds of further tightening if output gap deepens

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BSP signals lower tightening odds

Highlights

BSP Governor Remolona signals less likelihood of further tightening if the output gap becomes too negative, despite recent policy rate hike to 5.5%.
Philippine Q2 GDP growth slowed to 2.3%, and October headline inflation is expected to hit a median 7.6% according to a BusinessWorld analyst poll.
Peso breached the P64-per-dollar level and hit a record low of P64.17 on Oct. 27, prompting BSP intervention to manage inflation risks.

Policy outlook tied to growth and inflation signals

As reported by BusinessWorld Online, BSP Governor Eli M. Remolona, Jr. says the central bank is less likely to tighten further if the output gap turns too negative, even as officials still see the economy rebounding from its second-quarter slowdown.

Speaking on the sidelines of a European Chamber of Commerce of the Philippines event on Tuesday, Remolona says third-quarter gross domestic product is recovering and could improve further in the fourth quarter or the first quarter next year as government spending accelerates. He also says the GDP reading due on Nov. 9 will be one of the factors considered at the BSP's final policy meeting of the year on Dec. 17.

Remolona says the BSP is not yet ready to shift to an easing cycle because inflation is still expected to stay above the central bank's 3% target over the next two years. He adds that policymakers are closely watching core inflation, saying further tightening may not be needed if underlying price pressures are moving toward target.

Last month, the BSP raised its policy rate by 50 basis points to 5.5%, the highest level in nearly two years. The central bank's latest projections put headline inflation at 6.1% this year, 6% in 2027 and 3.3% in 2028, while external forecasters surveyed by the BSP expect inflation to remain above target over the next two years.

Weak demand and peso pressure shape the risk backdrop

Economic growth slowed to 2.3% in the second quarter, the weakest post-pandemic pace and, excluding the pandemic period, the softest expansion in more than 16 years. The BSP describes the output gap as the difference between actual and potential growth, with a negative reading pointing to weaker demand and lower demand-driven inflation pressure.

Price risks remain elevated. Headline inflation accelerated to 7.2% in September from 6.1% in August, while core inflation rose to 4.7%, and a BusinessWorld poll of 22 analysts points to a median 7.6% estimate for October.

Remolona also says sharp peso depreciation is unwelcome because it feeds inflation. The peso breached the P64-per-dollar level in late October and fell to a record low of P64.17 on Oct. 27, prompting the BSP chief to say the central bank goes in and out of the foreign exchange market as needed.

In our earlier article on the Philippines’ planned reforms to the pricing convention for peso-denominated government bonds and the anticipated inclusion in J.P. Morgan’s Government Bond Index-Emerging Markets, we explained how these steps could broaden the investor base and improve liquidity. We also noted that the benefits are not automatic: yields and inflows still hinge on global rates, exchange-rate expectations, and fiscal credibility, while the bigger payoff depends on whether cheaper funding and deeper capital markets translate into productive investment and stronger growth.

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