The Bangko Sentral ng Pilipinas (BSP) is navigating a delicate balancing act, as its campaign to cool still-hot inflation bears down on a weakening economy, while broadening price pressures threaten to delay the country's recovery even further.

According to the central bank, the Philippine economy now faces the twin challenge of heated inflation and tepid growth. It nevertheless pledged to keep price increases in check so that growth can recover on a sustainable basis, in line with its price stability mandate.

“In the face of a difficult combination of elevated inflation and slowing economic growth, the BSP remains determined to fulfill our mandate of pursuing price stability conducive to sustained and balanced growth,” the central bank said in a statement issued late on Wednesday.

The remarks came amid growing calls for the BSP to pause its monetary policy tightening after a fifth straight quarter of slowdown. Gross domestic product (GDP) growth eased to 2.1% in the July-to-September period, as soaring prices further dampened household consumption while agricultural output and investment declined.

It was the economy's weakest performance since the pandemic, when output contracted by 3.8% in the first quarter of 2021. Outside the pandemic, it marked the slowest expansion in almost 17 years, since growth of 1.8% in the fourth quarter of 2009. For the first nine months of the year, GDP growth averaged 2.5%, well below the government's 3.5%-4.5% full-year target.

Last week, Economy Secretary Arsenio M. Balisacan told a press briefing that the economy would feel the impact of the BSP's inflation-targeting rate hikes over the coming months. He added, however, that the tightening is “not necessarily bad for growth,” since taming inflation would eventually help lift consumption and investment.

Under its price stability mandate, the central bank raises its key rates to rein in inflation and keep inflation expectations anchored, particularly by tempering the second-order effects of price shocks on wage- and price-setting behavior.

“Since monetary policy is unable to control the direct inflationary effect of recent global supply shocks, it focuses on the second-round effects of such shocks,” the BSP noted.

Tightening, however, typically comes at the expense of growth, as higher borrowing costs curb aggregate demand and spending.

Inflation-Growth Balance

As the economic slowdown drags on, the central bank said it is weighing the implications of the third-quarter growth reading for the inflation outlook. It added that it will consider both weak demand and the need to keep inflation expectations anchored in its effort to contain second-round price effects.

“In the BSP's efforts to bring inflation down, it takes important account of the weakness in aggregate demand. It is also mindful of the need to prevent the de-anchoring of inflation expectations,” it said.

Inflation has been above the BSP's 3% target since March, when the energy shock driven by the Middle East war rippled through local commodity prices faster than economic managers had anticipated. In October, headline inflation accelerated to a nearly four-year high of 7.8%, as elevated energy prices drove up the cost of fuel, transport, and utilities. As of October, headline inflation averaged 5.6%.

“Restoring price stability and safeguarding households' purchasing power are essential to rebuilding confidence and supporting a durable economic recovery,” the BSP said.

It vowed that monetary policy settings would hinge on restoring the price stability needed for sustainable growth. “The BSP will ensure that monetary policy settings remain appropriate and consistent with its mandate of promoting price stability conducive to sustainable economic growth,” it said, adding that upcoming decisions will take into account developments in inflation and inflation expectations as well as economic activity.

Last month, the BSP raised its key policy rate by a larger-than-usual 50 basis points (bps) — half a percentage point — to a nearly two-year high of 5.5%, bringing its cumulative hikes to 125 bps since it first tightened in April. Because the policy rate serves as the benchmark for lending rates across the economy, each move feeds into borrowing costs for households and businesses. Its next rate-setting meeting is scheduled for Dec. 17, giving policymakers their next opportunity to weigh incoming inflation and growth data.

The BSP said easing inflation, steadier inflation expectations, stronger business and consumer confidence, and renewed investment and employment growth would signal that the economy is recovering. “These would indicate that inflationary pressures are subsiding while economic activity is regaining momentum,” it added.

The central bank projects inflation to settle at 6.1% this year, 6% next year, and 3.3% in 2028.

El Niño Risks

Meanwhile, Moody's Ratings noted that the Philippines is among the emerging market (EM) economies most vulnerable to El Niño-driven food price pressures, given its position as a net food importer — a country that buys more food from abroad than it sells.

“We expect El Niño-related food-price pressures to be concentrated in a relatively small group of vulnerable sovereigns rather than across EMs as a whole given the current record-high, though unevenly distributed, global food reserves such as grains, wheat and rice,” the global credit rating agency said in a separate report on Thursday. “Of particular sensitivity could be the large net food importers with thinner current reserves, such as the Philippines and Egypt,” it added.

Last month, the Philippine Atmospheric, Geophysical and Astronomical Services Administration said a strong to very strong El Niño is active in the Tropical Pacific. The weather phenomenon — the warm phase of a recurring Pacific climate cycle, typically associated with drier conditions that can pressure harvests — is expected to peak before the year ends and to last until the first quarter of 2027.

Even so, Moody's Ratings expects the Philippine economy to grow 3.3% this year before reaching the government's 5%-6% target range through 2030, with growth of 5.1% in 2027 and 5.5% in 2028 - all unchanged from its August projections. The agency also kept its inflation forecasts at 6% for 2026 and 2027, and 4.5% for 2028.

Source: Originally reported by Katherine K. Chan for BusinessWorld Online.