BSP may hit long pause if economy rebounds in second half — UOB

THE PHILIPPINE ECONOMY may recover in the second half of the year, giving the Bangko Sentral ng Pilipinas (BSP) reason to stand pat for an extended period, Singapore-based United Overseas Bank Ltd. (UOB) said.

In its quarterly global outlook for the fourth quarter, UOB Group Research said the country’s gross domestic product (GDP) will likely expand around 4% in the July-to-December period.

“Nevertheless, downside risks to the outlook remain, including renewed geopolitical tensions in the Middle East, lingering governance-related challenges, potential weather-related disruptions from a Super El Niño, and the risk of tighter monetary conditions if inflation re-emerges,” UOB said.

“Taken together, we expect economic activity to improve gradually to ~4.0% in the second half of 2026, bringing 2026 full-year GDP growth to 3.2%, but below the government’s target range of 3.5%-4.5%,” it added.

In the second quarter, domestic growth slumped to a new post-pandemic low of 2.3% as last year’s flood control mess continued to drag investments and construction while the Middle East war-driven inflation dampened household spending.

In the first half of the year, GDP expanded by 2.6%.

Economy Secretary Arsenio M. Balisacan earlier said the economy has to grow by at least 4.4% in the second semester to hit the lower end of the government’s full-year target.

The BSP had also said that fiscal measures will likely help the economy regain growth momentum in the fourth quarter, with a full rebound expected by 2027.

UOB said gradual economic recovery, coupled with easing inflation, should allow the BSP to cap its tightening cycle and keep its benchmark rates unchanged until at least the third quarter of 2027.

In August, headline inflation eased a five-month low of 6.1% from 6.2% in July amid lower food and utility prices. This brought the year-to-date average inflation to 5.2%.

UOB sees inflation settling at 6% this year, before easing back to the BSP’s tolerance range at 4% next year. These are slower than the BSP’s 6.1% and 5.4% estimates, respectively.

“With inflation expected to remain on a gradual downtrend and return to BSP’s 2.0%-4.0% target range by 2027, while economic activity continues to recover at a modest pace, we expect BSP to pause further rate hikes in the coming months and maintain a prolonged hold thereafter,” the bank said.

“This would allow policymakers to assess evolving economic conditions while ensuring that the cumulative effects of past monetary tightening continue to transmit through the broader economy,” it added.

In August, the BSP’s policymaking Monetary Board tightened for a third straight meeting as it sought to preemptively contain inflation risks from the looming “Super El Niño,” potential wage hike, and volatile global oil prices.

It raised its key policy rate by 25 basis points (bps) to an over one-year high of 5%, bringing its cumulative hikes to 75 bps since it first tightened in April.

BSP Governor Eli M. Remolona, Jr. remained hawkish, leaving the door open to further tightening as necessary to ensure inflation steers closer to their target.

The Monetary Board is scheduled to hold two more policy reviews this year on Oct. 22 and Dec. 17.

UOB said the BSP’s policy stance could lean more hawkish if risks re-emerge from inflation, growth, global oil prices, geopolitical environment, peso swings, and the US Federal Reserve’s monetary policy.

“Any renewed inflationary pressures, external supply shocks, or sharper-than-expected currency depreciation could prompt a recalibration of the monetary policy stance,” it said.

On Friday, the peso slumped to a fresh low of P62.59 versus the dollar after falling by seven centavos to break its previous historic trough of P62.565 seen on Wednesday.

Year-to-date, the peso has weakened by P3.8 or 6.07% from its P58.79 finish on Dec. 29, 2025.

“The currency’s underperformance largely reflects the Philippines’ vulnerability to higher energy prices and supply security given its net oil-importing status, alongside uncertainty over the US Fed’s policy trajectory,” UOB said.

For UOB, the peso will likely trade past the P62-a-dollar level until next year as the strong greenback and external pressures continue to weigh on it.

It sees the peso depreciating to P62.9 against the greenback in the fourth quarter, before recovering next year to P62.7 in the first quarter, P62.5 in the second quarter, and P62.4 in the third quarter.

“Looking ahead, we see limited catalysts for a strong recovery in the PHP (Philippine peso). External headwinds, including lingering Middle East tensions and a higher-for-longer US interest rate environment, are likely to keep the USD (US dollar) well supported,” UOB said.

“Domestically, political and policy uncertainties, coupled with persistent macroeconomic imbalances, could continue to weigh on investor sentiment. The Philippines is expected to sustain sizeable twin deficits while the risk of a sovereign credit rating downgrade by Fitch and ongoing external financing needs remain key constraints on the PHP outlook,” it added. — Katherine K. Chan