Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. is optimistic that the resumption of monetary policy easing will help narrow the gap between the economy’s subpar output growth and its full potential.
“I hope so. That’s [policy easing] our main tool. We hope that our main tool is effective,” Remolona said last Thursday, April 10, after the Monetary Board cut key interest rates by 25 basis points (bps), lowering the policy rate to 5.5 percent.
To recall, the BSP said in its December 2024 Monetary Policy Report that the Philippine economy is expected to expand “below potential over the near term” because demand for goods and services is low despite subdued demand-side inflation pressures.
The central bank had said this difference between actual and potential gross domestic product (GDP)—called the negative output gap—will “remain negative until 2025,” before eventually closing by 2026.
These forecasts, based on the BSP’s Policy Analysis Model for the Philippines (PAMPh), considered the five-quarter low GDP growth rate seen in the third quarter of 2024, at 5.2 percent. Economic growth edged slightly up to 5.3 percent in the last three months of last year.
“Expansions in consumption and investment are seen to help narrow the output gap as the impact of previous monetary policy easing takes full effect,” the BSP said, referring to the total of 75 bps in interest rate cuts before it paused in February, which are expected to boost borrowings and consumption.
“The closure of the negative output gap by 2026 will be supported by higher real wages following the recent minimum wage increases in 16 regions and the potential impact of further policy rate cuts,” it added.
The BSP also expects the reduction of banks’ reserve requirement to “provide support to new loans for households and firms, potentially boosting consumption and investment.” Last year, the BSP slashed the reserve requirement ratio (RRR) for universal and commercial banks by 250 bps. Another 200 bps were reduced this year, bringing big banks’ RRR to five percent.
RRRs for digital and thrift banks were also cut, settling at 2.5 percent and zero percent, respectively.
“Improved labor market conditions and continued investment growth are seen to sustain potential output. Productivity is expected to rise due to robust economic activity and stable infrastructure spending,” the central bank noted.
It added that major economic reforms could also “shore up investments and business activity, further expanding the country’s potential output.”
Deutsche Bank Research said earlier that the punitive tariffs that United States (US) President Donald Trump slapped on trading partners threaten to widen this negative output gap, which would force the BSP to cut rates further.
Following the BSP’s resumption of monetary policy easing, the market expects hefty additional cuts, mainly to bolster domestic growth amid heightened global uncertainties. DBS Bank Ltd., a multinational banking and financial services group based in Singapore, doubled its previous quarter-point expectation to 50 bps in total cuts for the year.
In an April 11 report, DBS senior economist Radhika Rao cited slow economic growth, below-target inflation, and the central bank’s signal of continued easing as the primary factors considered in the updated forecast.
HSBC ASEAN economist Aris Dacanay expects larger cuts by the end of 2025, anticipating 50 bps more in further cuts in alternate rate-setting meetings: a quarter point each in August and December, bringing the policy rate to five percent by year-end.
This means no interest rate reduction in the June and October policy meetings.
Dacanay sees that the central bank will take “a very cautious approach” to cutting interest rates due to high global trade uncertainty and risk of foreign exchange (forex) market volatility.
Even more dovish, the think tanks Pantheon Macroeconomics and Capital Economics, along with Singapore-based United Overseas Bank (UOB), expect an additional 75 bps of cuts before year-end.
Among the major reasons cited were the within- and even below-target local inflation data, US tariff uncertainty, heightened expectations for more US Federal Reserve rate cuts after Trump’s tariff announcement, and “prolonged uncertainties” surrounding the global trade war.
The Cabinet-level Development Budget Coordination Committee (DBCC) targets a more ambitious six- to eight-percent GDP growth for 2025. Last year, Philippine economic growth stood at 5.7 percent, below the downscaled six- to 6.5-percent goal.