Philippines central bank tightening faces limits amid slowflation risks

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Philippines central bank tightening

Highlights

Philippines GDP growth slowed for a fifth consecutive quarter to 2.1% in July–September, while inflation accelerated to 7.8% in October, the eighth month above target.
BSP raised its key policy rate by 50 basis points to 5.5% on October 22, totaling 125 basis points since April, with only limited room for further hikes as slowflation persists.
Economists warn that further tightening beyond 50 basis points could hurt investment and employment, urging supplementary government supply-side measures to combat persistent inflation.

Policy path tightens as growth slows

As reported by BusinessWorld Online, economists say the BSP is confronting a slowflation backdrop in which weak but still positive growth coincides with high inflation, complicating the central bank's next policy steps.

Metropolitan Bank & Trust Co. Chief Economist Nicholas Antonio T. Mapa says the BSP should continue tightening for as long as its inflation outlook remains well above the 3% medium-term target. He says the economy is experiencing “slowflation,” which Metrobank defines as fast inflation, weak but positive growth and still stable employment.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. says the Philippines is not technically in stagflation, but is under a severe cost-push squeeze driven by supply shocks, persistent core inflation and a sharp growth deceleration. University of Santo Tomas economics chair Alain Jomarie G. Santos also says the country is not yet in stagflation, though current conditions increasingly resemble stagnation and may be evolving in that direction.

The pressure on policymakers builds after gross domestic product growth slows for a fifth straight quarter to 2.1% in July to September, down from 2.4% in the previous quarter and 4% a year earlier. Inflation accelerates to 7.8% in October, its eighth straight month above target, while the BSP projects inflation to average 6.1% this year, 6% in 2027 and 3.3% in 2028.

Limited room for further rate increases

Mapa says the BSP will likely end its tightening cycle with a 25-basis-point increase next month as it balances inflation control against fading growth momentum. He argues that higher rates will further weigh on investment demand and may do little to resolve imported fuel and food shocks that are driving much of the inflation surge.

Neri also sees limited space for additional tightening, but warns that an immediate pause carries bigger long-term risks. He says headline inflation at 7.8%, core inflation at 5.4% and deeply negative real policy rates could unanchor expectations and trigger broader wage and price adjustments if the BSP stops too soon.

At its Oct. 22 meeting, the BSP raises its key policy rate by 50 basis points to 5.5%, taking total hikes since April to 125 basis points. BSP Governor Eli M. Remolona, Jr. says a wider negative output gap would lower the odds of more increases, while any easing remains distant because inflation is still running hot.

Santos says the central bank may have only another 50 basis points of tightening room before higher borrowing costs begin to choke business activity and hiring. Neri says other government agencies should help contain inflation through targeted supply-side measures, including transport and construction vouchers, logistical and toll relief, electricity subsidies for cold-storage facilities and more disciplined public spending.

Previously, we examined Bank of England tightening as policymakers weighed proactive rate rises to curb persistent inflation risks.

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