Germany-based Deutsche Bank said a quarter-point rate cut on Thursday would help support Philippine economic activity, following the Bangko Sentral ng Pilipinas’ (BSP) revised forecast that the negative output gap will persist until 2027.

“We see the BSP lowering its policy rate by 25 bps [basis points] on Aug. 28,” Deutsche Bank Research said in an Aug. 24 commentary, after which the bank emphasized the shift in the BSP’s output gap forecast.

The negative output gap refers to the difference between actual and potential gross domestic product (GDP).

Deutsche Bank Research noted that the BSP said in its June monetary policy report that “the negative output gap was now expected to close towards end-2027, instead of end-2026 as we understood from earlier in March.”

“This opens the door for further easing in 2026, in line with Governor Eli M. Remolona Jr.’s comments to the media,” Deutsche Bank Research economist Junjie Huang said in an Aug. 7 commentary.

To recall, the central bank’s December policy report noted that forecasts from the BSP’s Policy Analysis Model for the Philippines (PAMPh) showed “the output gap will remain negative until 2025 and close by 2026 following the lower-than-expected economic expansion in the third quarter of 2024” at 5.2 percent.

“Expansions in consumption and investment are seen to help narrow the output gap as the impact of previous monetary policy easing takes full effect,” read the report.

However, based on the central bank’s latest June forecast, the economy is expected to “expand below its potential over the near term amid subdued domestic and external demand pressures,” suggesting it will take a prolonged period before the output gap eventually closes.

Moody’s Analytics also expects the BSP to “likely” announce this week its third policy easing for 2025, which would bring the cumulative reductions to 1.5 percentage points (ppt) since the central bank started its inflation-targeting easing cycle in August last year.

“A stable peso and low inflation will allow a 25-bp cut to five percent to bolster domestic demand and cushion the economy against global uncertainties,” Moody’s Analytics said in an Aug. 22 report.

Apart from his expected policy rate cut on Aug. 28, Huang has also projected the BSP to deliver another 25-bp rate reduction in December, bringing the rate down to 4.75 percent from the current 5.25 percent.

For Huang, the likelihood of two additional cuts will be driven by heightened “downside risks to growth ahead, and persistent below-target inflation.”

Remolona earlier asserted that the existing output gap is already narrow, and the economy stands in a “goldilocks” or ideal state. Against this backdrop, slashing key borrowing costs further by three quarters of a point is “unlikely.”

For the BSP chief, it is “more likely” that the central bank will cut key interest rates twice rather than once, given the nearly six-year-low inflation in recent months and muted second-quarter growth.

GDP grew 5.5 percent in the second quarter, slightly faster than the 5.4 percent in the first quarter but well below the 6.4 percent recorded a year ago.

It can also be recalled that Remolona said three rate cuts before year-end are “unlikely,” as such magnitude would exceed the “goldilocks” rate and output gap targeted by the BSP. He noted that the “output gap is already small.”

In principle, if the actual GDP is below capacity, there is a negative output gap, which is usually disinflationary. In contrast, if it is above capacity, there is a positive output gap, potentially driving inflation up.

Huang expects inflation to stay below the BSP’s two- to four-percent target until early 2026, before returning within range for the rest of that year. He also lowered his 2025 forecast to 1.6 percent from 1.8 percent, matching the BSP’s revised outlook in June, which was cut from 2.3 percent in April.

Measured against inflation, Huang said the real rate “remains elevated” despite expected inflation prints ahead.

Huang said President Ferdinand R. Marcos Jr.’s directive to suspend rice imports from September to October could add some upside risk to inflation, but it is “unlikely to cause overshoots in inflation for a sustained period” unless the suspension is extended or rice import tariffs are raised.

He explained that his expectation of a reduction in December, rather than October, was influenced by this two-month rice import suspension.

“We think that the BSP may want to wait and see how this announcement may impact overall inflation before further policy easing, given the large impact that rice prices, which is nine percent of consumer price index (CPI) basket, could have on inflation,” he said.

Meanwhile, Huang has retained his GDP growth projections at 5.7 percent for 2025 and 6.1 percent for 2026—both of which fall within the government’s growth target range of 5.5 to 6.5 percent and six to eight percent, respectively.

He also cited significant downside risks, noting that the latest United States (US) reciprocal tariff on Philippine exports of 19 percent remains two ppt above the 17-percent tariff announced in April and nearly double the 10-percent baseline.

Moreover, US President Donald Trump also slapped a 100-percent tariff on semiconductors, which could hit an estimated 10 to 15 percent of the country’s total exports, he further said.