BSP hints it may start easing in 2027

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) kept further rate hikes on the table amid lingering price pressures, but hinted it could begin easing next year if inflation falls faster than expected.

In its August Monetary Policy Report, the BSP said its “low-inflation scenario,” where inflation falls below its central projections, could create room for policy rate cuts to support economic growth.

“The low-inflation scenario shows elevated headline inflation in 2026, although marginally lower than in the central scenario,” it said. “Some policy tightening in 2026 is still necessary to contain high inflation, although a policy reversal in 2027 could become possible in response to weakening economic prospects.”

Under this scenario, inflation will move closer to its 3% target by the second quarter of next year.

The BSP’s central projections show inflation could breach its target for three straight years at 6.1% this year, 5.4% in 2027, and 3.3% in 2028.

On the other hand, inflation remaining above its target for an extended period could warrant additional rate hikes, the BSP noted.

“The high-inflation scenario pushes headline inflation further above the 3% target over the forecast horizon,” it said. “This suggests the need for a tighter monetary policy stance to help contain sustained cost-push shocks from further broadening into the CPI (consumer price index) basket.”

At its August meeting, the Monetary Board raised its key policy rate by 25 basis points (bps) for a third straight meeting to an over one-year high of 5% as it sought to preemptively rein in lingering and emerging inflationary pressures.

This brought its cumulative hikes to 75 bps since it began tightening in April.

Based on the BSP’s survey of external forecasters (BSEF) for August, nearly 70% of the 21 analysts polled anticipate further tightening this year before the BSP returns to easing next year.

“Almost 70% of analysts expect the BSP to raise the policy interest rate by 25-75 bps for the remainder of 2026 and to ease policy settings in 2027,” the central bank said.

This came as the latest BSEF yielded a median headline inflation forecast of 5.3% for the year ahead, slower than the 6% estimate in June.

Their forecast for the next two years also dipped to 4% from 4.1%, while their outlook for the next three years is down to 3.3% from 3.4%.

“Results from the August 2026 BSP Survey of External Forecasters (BSEF) show that analysts’ inflation forecasts have shifted lower, reflecting easing global commodity prices despite uncertainty surrounding the ongoing Middle East conflict,” the BSP said. “Average inflation is projected to decline steadily over the next 12-36 months, eventually settling within the tolerance range by 2028.”

The central bank also noted that analysts’ projection for the three years ahead indicate that long-term inflation expectations remain anchored.

Meanwhile, the analysts polled also see core inflation breaching the BSP’s target at 4% for the year ahead, 3.4% for the next two years, and 3% over the next three years.

“Analysts are also monitoring core inflation, which remains elevated,” the BSP said. “Moreover, additional wage adjustments and the potential impact of El Niño conditions on agricultural production are likely to add to inflationary pressures.”

In August, headline inflation eased a five-month low of 6.1% from 6.2% in July amid lower food and utility prices, the latest Philippine Statistics Authority data showed.

However, it stayed above the central bank’s 3% target for a sixth straight month, bringing the year-to-date average inflation to 5.2%.

Core inflation, on the other hand, cooled for a second month in a row as it settled at 4.1% in August from 4.2% in July.

NEGATIVE OUTPUT GAP
Meanwhile, the central bank said in its report that the Philippines may see a wider output gap this year as the economy grapples with weak household consumption and investments.

“The negative output gap is projected to widen in 2026 due mainly to subdued private consumption and lower investment,” it said.

“Adverse economic sentiment is expected to weigh further on investment. Household consumption is likewise seen to remain muted in the near term, reflecting weaker income growth and elevated inflation,” it added.

Last month, BSP Governor Eli M. Remolona, Jr. said the economy continues to suffer from a negative output gap especially after domestic growth slowed for a fourth straight quarter.

In the second quarter, the economy posted a new post-pandemic low growth of 2.3%, weaker than 2.8% in the first quarter and 5.4% a year ago.

This was the economy’s worst performance since it contracted by 3.8% in the first quarter of 2021. It likewise marked the slowest nonpandemic gross domestic product (GDP) growth in over 16 years or since the 1.8% in the fourth quarter of 2009.

The latest slowdown came as cautious spending and investment following last year’s flood control scandal weighed on public construction, while elevated inflation amid the ongoing Middle East conflict squeezed household spending.

Investments, measured by the gross capital formation, dropped by 9.2% in the second quarter. This was steeper than the 3.1% contraction in the previous quarter and marked a reversal of the 0.91% climb a year ago.

Meanwhile, household spending growth eased to 2.8% in the second quarter from 3% in the first quarter and 5.2% in the same period last year.  This was the weakest since the 4.8% decline in the first quarter of 2021.

In the first half of the year, the country’s GDP expanded by an average of 2.6%.

According to the BSP, the output gap is a summary indicator of the relative demand and supply conditions in the economy, which it uses to assess the degree of demand-based inflation pressure.

An economy posts a negative output gap when its actual output is less than its full potential, which leads to falling prices amid weak demand.

On the other hand, a positive output gap, where the economy produces more than its potential, results in rising prices because demand is strong.

Weak consumer and business sentiment may continue to weigh on the country’s investment climate, making its near-term growth prospects “less favorable,” according to the BSP.

The central bank also noted that a tighter monetary policy will widen the country’s negative output gap.

“The negative output gap widens further under a more restrictive monetary stance,” it said.

However, the BSP said the government’s planned catch-up spending on infrastructure could boost its overall consumption, easing some pressure on the output gap in the second half of the year.

“The output gap is thus seen to narrow in 2027, as investment and trade recover, and household consumption improves,” it added.