In a period of global economic uncertainty, the Bangko Sentral ng Pilipinas (BSP) is walking a tightrope between managing inflation and fostering economic growth.
Recent data reveals a delicate balancing act, with inflation forecasts holding steady and domestic liquidity on the rise.
The BSP’s latest inflation report confirms that the July 2025 inflation rate is well within its forecast range of 0.5 to 1.3 percent. This stable outlook is largely attributed to the continued easing of rice prices, a welcome development for Filipino households.
Looking ahead, the central bank projects that inflation will average below the lower end of its target in 2025, providing a much-needed buffer against external pressures.
However, the outlook is not without its challenges. The BSP notes that while inflation is expected to trend higher in 2026 and 2027, it should remain “firmly within the 2.0 to 4.0 percent target range.”
BSP signals accommodative stance amid growth
This projection is set against a backdrop of global economic deceleration, influenced by ongoing geopolitical conflicts and trade policy uncertainty, which could contribute to slower domestic growth.
In response, the central bank has signaled that a more accommodating monetary policy stance is warranted, ensuring that its policies support sustainable economic growth and employment.
This measured approach is also reflected in the country’s domestic liquidity.
According to preliminary data from the BSP, the amount of money in the economy, or M3, grew by 6.3 percent year-on-year to approximately ₱18.6 trillion in June. This marks an acceleration from the 5.5 percent growth recorded in May, signaling a robust expansion of the money supply.
The growth in M3 is primarily fueled by a surge in claims on the domestic sector, which rose by 10.7 percent. A closer look reveals that private sector claims, driven by increased bank lending to non-financial corporations and households, grew by 11.3 percent.
This suggests that businesses and consumers are more actively borrowing, which can be a key driver of economic activity. The central government also contributed to this growth, with its net claims increasing by 7.5 percent due to higher borrowings.
BSP cuts rates to bolster economic activity
Effective June 23, 2025, the BSP’s Target Reverse Repurchase (RRP) rate has been trimmed by 25 basis points to 5.25 percent, a decision made by the Monetary Board on June 19.
This adjustment ripples across the financial system, with corresponding changes setting the overnight deposit facility rate at 4.75 percent and the overnight lending facility rate at 5.75 percent.
The rate cut signals the central bank’s confidence in the prevailing inflation environment and its commitment to providing monetary support to the Philippine economy. By lowering borrowing costs for banks, the BSP aims to encourage greater lending to businesses and consumers, thereby stimulating investment, consumption, and overall economic activity.
This carefully considered recalibration reflects the Monetary Board’s assessment of current macroeconomic conditions and its forward-looking stance on price stability and sustainable growth. Crucially, these changes directly impact the BSP’s Discount Window Facility (DWF) interest rates.
The DWF serves as a crucial liquidity lifeline for banks, allowing them to borrow funds from the central bank, typically for short-term liquidity needs. When the cost of borrowing from the BSP decreases, it can translate into lower funding costs for banks, which may, in turn, influence the interest rates they offer to their own clients.
Central bank navigates currency swings amid dual mandate
On the other hand, the country’s net foreign assets (NFA) saw a decline, decreasing by 1.7 percent in June. This was primarily due to the peso’s appreciation against the US dollar, which reduces the peso value of foreign currency assets held by the BSP.
Despite this, banks’ NFA holdings increased, largely because of larger holdings of foreign currency-denominated debt instruments.
The BSP’s dual mandate of maintaining price stability and fostering economic growth is at the forefront of these developments.
The central bank’s commitment to ensuring that domestic liquidity conditions align with its monetary policy stance is crucial for achieving these objectives.
As the global economic landscape continues to shift, the BSP’s proactive monitoring and strategic adjustments will be essential in steering the Philippine economy toward a path of resilience and sustainable progress.
