BSP seen favoring expansionary policy

THE Bangko Sentral ng Pilipinas (BSP) policy rate could end up at a below-neutral 4.75 percent by the end of the year as monetary authorities move to boost economic growth.

“[W]e continue to believe [the] BSP has scope to steadily shift towards a more accommodative stance,” Nomura said in a report last Friday, “as inflation expectations remain well-anchored and domestic demand is still subdued.”

An additional 75 basis points (bps) of rate cuts will likely be delivered this year, the financial services firm reiterated, taking the policy rate to a below-neutral 4.75 percent.

The current consensus is that the BSP will cut only twice more this year, Nomura noted.

Central bank Governor Eli Remolona Jr. also indicated that last month, saying that monetary authorities were likely to cut twice more, “but not necessarily consecutive,” with monetary authorities opting to remain cautious amid heightened global uncertainties.

A below-neutral rate can boost the economy by stimulating consumption and investments, as opposed to the neutral rate that is the theoretical level where it neither restricts nor raises growth.

The BSP's benchmark rate currently stands at 5.5 percent following cuts totaling 100 bps since August last year. It unexpectedly paused in February as trade worries mounted, but resumed easing in April via a 25-bps cut.

The next policy meeting will be on June 19 and many analysts expect another 25-bps reduction with inflation below the 2.0- to 4.0-percent target and first-quarter economic growth of 5.4 percent, short of the 6.0- to 8.0-percent goal.

'Sub-par' growth

Nomura said that 2025 gross domestic product (GDP) growth could be a “sub-par” 5.3 percent, with the target for the year also likely to be lowered.

The first-quarter result, it added, suggests that businesses “have already become cautious amid surging global trade uncertainty, even in a less trade-oriented economy.”

The output gap — a measure of the difference between actual and potential economic output — was said to have turned negative and would likely widen.

“We continue to expect business sentiment to weigh on investment spending, and export growth to weaken from the impact of the US tariffs, including via indirect effects,” Nomura also said.

While it expects GDP growth to pick up to 5.6 percent in 2026 on the back of infrastructure spending, this remains below the government's 6.0- to 8.0-percent target for this year to 2028.

As for inflation, Nomura said the rate was likely to average 1.8 percent this year due to the negative output gap, low crude oil prices and government supply-side measures, particularly to keep rice prices low.

Inflation could fall to 1.3 percent in the third quarter, it said, before rising to 2.0 percent by the end of 2025.

HSBC Global Research economist Aris Dacanay, meanwhile, said that with inflation below target, the likelihood of a June rate cut in June had substantially increased, more so with first-quarter growth surprising to the downside.

“The peso's relative strength may have also given the BSP room to cut policy rates regardless of whether the Fed cuts rates or not,” he added.

However, Dacanay said the BSP could still pause its easing cycle in June as it waits for “more details regarding the US' proposed tariff measures.”

“The BSP does have the privilege to take a measured approach given how insulated the economy is to any headwind in trade,” he added.

“That being said, the 19 June Monetary Board meeting will likely be a tough call.”

Wage hike pressure

Chinabank Research echoed this, saying that while inflation could give more space for the BSP to cut, the central bank will still likely remain “cognizant of persisting upside risks to the inflation outlook,” including upticks in food prices and the proposed legislated wage hike.

“We expect inflation to remain low in the next months, though a hefty increase in the minimum wage could add to inflationary pressures,” it said.

If signed into law, the House of Representatives-approved P200 per day increase in minimum wages nationwide could boost inflation over the short term, Philippine Institute for Development Studies senior fellow John Paolo Rivera said.

Companies will likely pass the cost on to consumers via higher prices, he said, “especially in labor-intensive sectors like manufacturing, food services, and retail.”

“It may [also] discourage hiring, particularly among MSMEs (micro, small and medium enterprises) … This could lead to slower job creation or even layoffs, especially if the wage hike is not matched by productivity gains,” Rivera added.

“To minimize these adverse effects, [the] NG (national government) should accompany the wage hike with targeted support for MSMEs (such as tax relief, credit access, or training), and focus on productivity-enhancing programs to ensure that wage increases are sustainable and not distortionary.”