ANALYSIS: Easy-cash era ‘til early 2026 to arrest economic fallout from corruption woes

Manila, Philippines – Expect the cost of borrowing money to become cheaper – close to three-year lows or pre-pandemic levels - at least until early 2026, economists said.

That’s because the risk of economic fallout from the corruption scandal outweighing other external factors such as weaker exports from Trump tariffs could compel the central bank to hold back from unwinding its easing monetary cycle just yet.

The Bangko Sentral ng Pilipinas (BSP) policymaking Monetary Board instead could deliver more rate cuts - a quarter-percentage point at its last meeting in December this year and 50 basis points early next year - to bring interest rates to as low as 4 percent, Fitch Solutions’ BMI said in a research note on Monday.

As inflation - the rate at which consumer prices rise - stays below the central bank’s target, the monetary authority could prioritize the economy and keep it humming with money supply through more rate cuts, BMI said. Lower interest rates discourage banks from keeping cash in central bank vaults and instead prod them to lend at a margin to make profit, allowing money to flow into the economy.

“We previously highlighted that GDP growth in 2025 will probably fall below the Development Budget Coordination Committee’s target range of 5.5-6.5% - we forecast just 5.4% growth,” the Fitch Solutions unit said.

“The downbeat assessment of the economy in the press release as well as Governor Eli Remolona alluding to weakening business sentiment due to ‘governance concerns over public infrastructure spending’, suggest the central bank is coming round to our view,” it added.

‘Credible resolution’

At a press conference after the Oct. 9 Monetary Board rate-setting meeting, BSP Governor Eli Remolona did not mince words when he said a “credible resolution” is necessary to allay investor worries over governance that are dimming the economic team’s growth outlook.

“If you look at the past, we said 6% [growth], it turned out to be lower than that. And now we know why. Because what we thought was going to investment wasn’t going there at all. So the reason we were underperforming is I think in large part because of the governance issues related to infrastructure spending,” Remolona told a press briefing.

The writing is on the wall: The peso underperforms its peers to depreciate past the P58-per-dollar mark, Philippine shares have become undervalued relative to their regional peers, the main index skidded to a six-month low, hot money registered outflows as foreigners dumped stocks for weeks, and exports cooled to low single digits in August at 4.6 percent from July’s 17.6 percent as shipments to US shrank.

“External factors are still there. They’re still affecting our outlook. But I do think that this governance issue is a bigger factor for now. We’re hoping it will be short-lived. Of course it depends on what we do, what the ICI does, where these investigations lead,” Remolona said, referring to the Independent Commission for Infrastructure probing widescale scandals in public works projects.

“Very important we need a credible resolution to this issue,” the BSP governor said.

Thursday’s rate cut was a surprise for financial markets that have been expecting a hold. The urgency by which the central bank tweaked borrowing costs even lower, and the dovish rhetoric that followed, pointed to prospects that credit will be easily accessible to those who have the wherewithal to stimulate the economy.

How soon more rate cuts will feed through the economy and how potent they will be in pumping the economy when it is investor confidence that is the issue (not demand side), or if the central bank will use other tools at its disposal, is not yet clear.

“We expect at least one additional 25bps cut before the current cycle ends,” Gareth Leather, senior economist at London-based Capital Economics said in a research note.

“Looking ahead, the economy could use more support. While GDP growth has held up reasonably well so far this year, it faces headwinds from tighter fiscal policy and weaker exports. The ongoing fallout from the corruption scandal could further weigh on activity,” he wrote.

The central bank’s current easing cycle, which began in July 2024, has so far brought interest rates down by 175 basis points to 4.75 percent.