BSP less likely to keep tightening if output gap turns ‘too negative’

The Bangko Sentral ng Pilipinas (BSP) expects the Philippine economy to have rebounded modestly in the third quarter, but a widening negative output gap could reduce the odds of further rate hikes, its governor said.

Speaking to reporters on the sidelines of a European Chamber of Commerce of the Philippines (ECCP) event on Tuesday, BSP Governor Eli M. Remolona, Jr. said third-quarter gross domestic product (GDP) growth may have improved from the post-pandemic low recorded in the second quarter.

Asked about his expectations for the July-to-September growth print, Mr. Remolona said: “It’s recovering.”

“The third quarter is over. So, our expectation is that (the economy) will pick up in the fourth quarter or first quarter next year,” he said in mixed English and Filipino. “The government is trying very hard to accelerate spending.”

In the second quarter, economic growth slowed for a fourth straight quarter as an investment slump from last year’s flood control scandal and Middle East war-driven energy shocks weighed on domestic activity.

GDP growth slid to a new post-pandemic low of 2.3% in the April-to-June period. Excluding the pandemic, this was the weakest expansion in over 16 years or since 1.8% in the fourth quarter of 2009.

Following the Monetary Board’s Oct. 22 meeting, Mr. Remolona had said he expects the economy to pick up early next year driven by fiscal measures, which would provide them with additional tightening space.

On Tuesday, Mr. Remolona said the central bank might not tighten further if the output gap becomes too negative.

“Because tightening or easing takes account of both inflation and growth… We have what we call the output gap — that’s the difference between our actual growth rate and potential growth rate. So, if that’s too negative, it’s less likely that we will tighten,” he added in mixed English and Filipino.

According to the BSP, the output gap is a summary indicator of the relative demand and supply conditions in the economy, which it uses to assess the degree of demand-based inflation pressure.

An economy posts a negative output gap when its actual output is less than its full potential, which typically leads to falling prices amid weak demand.

The third-quarter GDP growth data, which will be released on Nov. 9, will be among the BSP’s considerations at its last policy meeting this year on Dec. 17, Mr. Remolona said.

However, he said the central bank is not yet prepared to reverse to an easing cycle as it expects the economy to rebound slightly and inflation to remain above its 3% target over the next two years.

“Easing? Not yet, we’re still on a tightening path, so we don’t know. The tightening might… you know, the inflation rate doesn’t adjust so quickly,” the BSP chief said.

Last month, the central bank raised its policy rate by 50 basis points to 5.5%, as it sought to curb rising inflationary pressures. This is the highest in nearly two years or since the 5.75% in February 2025.

According to Mr. Remolona, it might take a few more months before headline inflation will hit its peak, adding that the BSP is tightly monitoring core inflation.

“We’re really keeping a close eye on the core (inflation) because there’s nothing we can do about the volatility,” Mr. Remolona said in Filipino. “So, if the core (inflation) looks okay and is heading toward the target, then we won’t need to tighten.”

Fresh surges in fuel, food, housing, and utility prices drove headline inflation to 7.2% in September — the fastest pace in three-and-a-half years — from 6.1% in August, matching this year’s peak first recorded in April. Year to date, average inflation stood at 5.4%.

Core inflation, which discounts volatile food and energy prices, accelerated to a nearly three-year high of 4.7% in September, bringing the nine-month average to 3.8%.

A BusinessWorld poll of 22 analysts yielded a median estimate of 7.6% for the October clip, which would mark the fastest inflation in nearly four years or since 8.6% in February 2023 and match the March 2023 reading.

The central bank’s latest projections see headline inflation settling at 6.1% this year, 6% in 2027, and 3.3% in 2028.

Based on the BSP’s survey of external forecasters as of Oct. 21, the mean headline inflation forecast of 17 analysts stood at 5.4% for the year ahead, 4.1% over the next two years, and 3.6% over the next three years.

External analysts consulted by the BSP expect core inflation to average 4.1% in the coming year, 3.4% in the two years ahead, and 3.1% in the three years ahead.

Meanwhile, Mr. Remolona noted that sharp peso depreciation is unfavorable for the BSP as it affects the country’s inflation.

“If the depreciation is too sharp, we don’t like it. It affects inflation (if it’s) too sharp. We have an estimate of what counts as too much,” he said in mixed English and Filipino.

Mr. Remolona added that they “go in and out” of the foreign exchange market when asked how active their intervention is.

The local unit breached the PHP 64-a-dollar level for the first time in late October. It hit a historic trough of PHP 64.17 against the greenback on Oct. 27 after finishing at record lows for seven consecutive trading days. — Katherine K. Chan