Germany-based Deutsche Bank stated that the Bangko Sentral ng Pilipinas’ (BSP) cumulative 1.25-percent interest rate reductions have been unable to lift lending growth, as lower borrowing costs were not enough to outweigh persistent economic uncertainty.

This follows BSP Governor Eli M. Remolona Jr.’s earlier statement that although recent developments in inflation and economic growth allow room for further interest rate cuts, these reductions “cannot really compensate entirely for the slowdown in growth.”

“We agree to some extent, as overall credit growth has not gained much momentum despite the BSP’s cumulative 125 bps [basis points] rate cuts so far,” Deutsche Bank Research said in a commentary dated July 4. This figure accounts for all reductions since the BSP began easing in August last year.

Deutsche Bank Research was not primarily pointing toward the lowered key interest rates as the major factor to the sluggish credit activity in the country. The policy rate now stands at 5.25 percent from 6.5 percent before the monetary policy loosening cycle started a year ago.

It instead noted that “the ongoing uncertainty is likely a larger factor than interest rates in businesses holding back their decisions to borrow.”

Based on the latest BSP data, loans from big banks—or universal and commercial banks—grew at a slower pace of 11.2 percent in April, down from March’s 11.8-percent expansion, due to weaker lending to both residents and non-residents.

Loan growth moderated as lending to major industries expanded at a more moderate pace, including real estate at 8.9 percent, wholesale and retail trade at 9.9 percent, manufacturing at 0.6 percent, financial and insurance activities at 7.5 percent, information and communication at 7.7 percent, and transportation and storage at 14.9 percent.

Since the return of United States (US) President Donald Trump to power, his protectionist trade policies—including reciprocal and baseline tariffs across the board—have become a destabilizing force for the country’s trade partners.

With the three-month pause ending this week, the Philippines would have faced a 17-percent reciprocal tariff if the government had not successfully negotiated a lower rate for its exports to the US.

Additionally, rising tensions in the Middle East—where the US has chosen to be directly involved—have heightened risks to global economic growth.

Given subdued inflation and economic growth still below target, alongside a relative stability of the Philippine peso, Deutsche Bank Research said it expects another quarter-point cut in August, potentially bringing the key borrowing rate down further to five percent.

Despite inching up slightly in June, last month’s 1.4-percent inflation rate remains below the two- to four-percent target of the government. Excluding May’s print, June inflation is still the slowest in five-and-a-half years, or since November 2019.

According to the Philippine Statistics Authority’s (PSA) latest data, the country’s economic output expanded by 5.4 percent in the first quarter of the year, slower than the 5.7 percent recorded in the same period last year. It also showed minimal improvement from the 5.3-percent growth in the previous quarter.

Deutsche Bank Research argued that these economic conditions increase the “possibility of further rate cuts after August,” suggesting that BSP policy easing is unlikely to end next month.

Apart from inflation, growth, and foreign exchange (forex) factors, the German bank also expects the BSP to closely monitor the resumption of the US Federal Reserve’s policy easing to determine its own easing timing.