Introduction to Economic Projections
The Bangko Sentral ng Pilipinas (BSP) has released its latest monetary policy report, which includes projections for inflation and economic growth in the upcoming years. These projections assume that there will be no further cuts to interest rates or bank reserve requirements.
Inflation Projections
The BSP has forecasted inflation rates of 3.2 percent and 3.0 percent for 2026 and 2027, respectively. These projections are based on expectations of lower oil prices, which will be offset by the lagged impact of prior rate cuts and a weaker peso.
Economic Growth Projections
Economic growth is expected to be significantly weaker due to adverse business sentiment weighing on economic activity. The forecast for 2025 has been lowered to reflect the third quarter’s market slowdown, while the outlook for this year has also been cut due to an investment slowdown. A slight rebound is expected in 2027, with the delayed impact of rate cuts providing support. However, continued uncertainty over global economic policies will pose a downside risk.
Output Gap and Potential Output Growth
The output gap, which is the difference between actual and potential output, has become more negative compared to the August outlook due to governance issues that have dampened investor confidence. The gap will remain negative and gradually narrow to a near-neutral level by the end of 2027. Potential output growth will moderate in the near term due to private investment being affected by weak economic sentiment and subdued public spending.
Factors Affecting Economic Growth
Rising real wage and household incomes could support consumption, while a gradual recovery in investment activity and infrastructure spending is expected to underpin overall demand beginning in 2027. The projections assume no further adjustments to either the policy interest rate or the reserve requirement ratio over the forecast horizon.
Assumptions and Considerations
The projections are based on assumed minimum wage hikes of 5.6 percent for this year and the next, which is consistent with historical adjustments. The projections are also aligned with the government’s fiscal deficit targets and legislated tax measures, including annual "sin" tax hikes.
Monetary Policy
The BSP has cut key interest rates by 200 basis points since August last year as an inflation surge ended. The policymaking Monetary Board views the current monetary policy easing cycle as nearing its end. However, the continued below-target growth could give the BSP room to deliver two rate cuts this year.
Conclusion
In conclusion, the BSP’s latest monetary policy report provides insights into the projected inflation and economic growth rates for the upcoming years. The projections are based on various assumptions and considerations, including lower oil prices, a weaker peso, and the impact of prior rate cuts. The report also highlights the importance of monitoring economic sentiment and adjusting monetary policy accordingly to support economic growth and stability.
