Philippine economy slowdown spurs calls to pause rate hikes

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Philippine economy slowdown calls

Highlights

Philippine GDP growth slowed to the weakest pace since the pandemic, prompting major economists to expect Bangko Sentral ng Pilipinas to pause rate hikes.
Despite a 7% peso drop against the dollar this year and resurging inflation, policymakers face pressure to support the economy as household spending and retail stay soft.
Economists project growth will remain subdued through Q4 and only reach 4% to 5% by Q1 2027, challenging the government's 3.5% to 4.5% 2026 target.

Growth slowdown reshapes policy expectations

As reported by Bloomberg, economists from China Banking Corporation, Metropolitan Bank & Trust Co., Union Bank of the Philippines and Pantheon Macroeconomics are raising the possibility that the Bangko Sentral ng Pilipinas will pause further interest rate increases after last quarter's growth weakened to its slowest pace since the pandemic.

Metropolitan Bank Chief Economist Nicholas Mapa said aggressive tightening makes little sense while the economy is already facing difficult conditions. Inflation is resurging because of the protracted Iran war and farm damage caused by monsoon rains, adding strain to a consumption-driven, import-dependent economy that is trailing much of Southeast Asia.

Household spending remains soft and is weighing on industries including retail and real estate. BSP Governor Eli M. Remolona Jr. said last week that the central bank remains in a tightening cycle as it fights persistent price pressures, although the BSP has also said fiscal measures are expected to help the economy recover after its larger-than-expected half-point rate increase last month.

China Banking Chief Economist Domini Velasquez said growth is likely to remain subdued through the fourth quarter before recovering toward the 4% to 5% range by the first quarter of 2027. She said demand conditions remain clearly weak, with a sizable negative output gap.

Government faces pressure to support recovery

The government is targeting 3.5% to 4.5% growth for 2026, but Economic Planning Secretary Arsenio Balisacan said on Monday that reaching that goal will be very challenging. The outlook for the current quarter also remains weak despite the usual lift from Christmas spending, while El Niño is threatening further damage to agriculture after the sector posted a record slump last quarter.

Any central bank pause is complicated by the peso, which is down 7% this year against the dollar and is Asia's second-worst-performing currency. That leaves policymakers balancing weak domestic activity against currency pressure and stubborn inflation.

Jonathan Ravelas, senior adviser at Reyes Tacandong & Co. in Manila, said weak growth means the government must do the heavy lifting, particularly by increasing food supply and rebuilding local production to lower prices. The Makati Business Club is also urging the Marcos administration to restore business confidence and speed up infrastructure projects, with Executive Director Julia Abad saying the policy response must also strengthen governance, institutions and policy execution.

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