Philippine banks are tightening credit standards despite the central bank's shift toward monetary easing, a disconnect that threatens to stall the country’s economic recovery.

Even as the Bangko Sentral ng Pilipinas (BSP) reduced its benchmark interest rate to 4.25 percent, financial institutions have remained risk-averse, reflecting a cautious approach to balance sheet management in an uncertain regulatory environment.

In a commentary published Feb. 23, economic think tank GlobalSource noted that banks are acting pro-cyclically.

“Banks have acted pro-cyclically: even as the BSP adopted a substantially accommodative stance, many institutions tightened their credit standards, reflecting heightened risk aversion and balance sheet caution,” GlobalSource said.

Pro-cyclically behavior—tightening lending criteria while the central bank attempts to stimulate the economy—suggests that risk aversion is outweighing the BSP’s accommodative stance, GlobalSource said.

It warned that this trend could exacerbate the broader economic slowdown that began last year, when gross domestic product (GDP) growth slumped to 4.4 percent amid significant erosion of investor confidence.

GlobalSource economist Diwa Guinigundo noted that the economy has yet to respond decisively to the recent series of interest rate cuts.

BSP Governor Eli M. Remolona Jr. admitted last week that monetary policy alone may be reaching its limits in reviving growth.

Remolona signaled that the burden of economic stimulus must now shift toward fiscal policy and executive action, challenging government agencies to perform “heavier lifting” to support the recovery.

The current environment of “accommodation and caution” follows a period of heightened political and economic instability. Confidence was severely impacted in 2025 following a high-profile flood control scandal, which has since left lawmakers and the executive branch under pressure to restore transparency and efficiency.

Guinigundo said that without structural improvements—specifically addressing logistics bottlenecks, supply chain inefficiencies, and regulatory ambiguity—further rate cuts risk becoming ineffective, a scenario economists describe as “pushing on a string.”

The sentiment was echoed by private sector analysts during a business-government forum on Tuesday. Robert Dan J. Roces, group economist at SM Investments Corp., suggested that the cycle of aggressive policy easing may be nearing its end.

The BSP’s most recent move brought cumulative interest rate cuts to 225 basis points, but Roces noted that any future adjustments by the Monetary Board must be measured and strictly data-dependent.

As banks hold back on lending, the focus turns to whether the government can implement the necessary fiscal reforms to unlock credit and stimulate demand.