Growth rebound may give BSP room to hike rates

A rebound in Philippine economic growth in the second half of the year could strengthen the case for further interest rate hikes by the Bangko Sentral ng Pilipinas (BSP) as it continues to fight surging inflation, Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. said.

In a recent commentary, Neri said stronger growth would give the central bank more room to raise rates even as elevated inflation weighs on economic activity.

“Despite the drag from inflation, GDP growth is expected to improve in the second half of the year, supported by favorable base effects and a potential recovery in government spending,” he said.

“Stronger economic activity could give the BSP greater confidence that the economy can absorb additional rate hikes.”

Philippine gross domestic product (GDP) growth slowed to 2.8 percent in the first quarter of 2026 as delays in public infrastructure projects linked to the flood control scandal coincided with the onset of the Middle East war in March.

Growth weakened further to 2.3 percent in the second quarter, its slowest pace since 2009 outside the pandemic recession, as the Gulf conflict pushed up domestic fuel prices and other costs. Household spending, which accounts for a major share of the economy, slowed to 2.8 percent in the second quarter from 3 percent in the first as higher prices eroded purchasing power.

However, inflation accelerated over the same six-month period, prompting the BSP to raise its policy rates by a total of 75 basis points over three consecutive monetary policy meetings.

Rate hikes typically take about a year to fully work their way through the economy and can weigh on growth by discouraging borrowing and consumption. Household spending accounts for roughly two-thirds of GDP.

BSP Governor Eli Remolona Jr. has said the economy could recover in the second half of 2026 as the government ramps up delayed infrastructure spending.

“I believe the government has been working strenuously to accelerate infrastructure spending, and we expect that growth will recover by the fourth quarter of 2026,” he said following the BSP’s third consecutive rate hike in August.

“The fundamentals for growth are still in place. So, we think growth will, more or less, fully recover by next year,” he added.

Government spending data, however, show that the recovery in infrastructure outlays remains uneven. The Department of Budget and Management reported that infrastructure and other capital outlays reached P89.6 billion in July, down P3.7 billion, or about 4 percent, from P93.3 billion a year earlier.

Although the annual decline narrowed significantly from 40.8 percent in June, the improvement came amid a steep year-to-date shortfall. Infrastructure and other capital outlays totaled P457 billion from January to July, down P256.5 billion, or 36 percent, from the same period last year.

Weak infrastructure spending and rising prices have also prompted several international institutions, including the World Bank, Asian Development Bank and International Monetary Fund, to downgrade their 2026 Philippine growth forecasts to around 3 percent.

The Philippine Statistics Authority is slated to report the third quarter growth figures on 9 November 2026.