THE Bangko Sentral ng Pilipinas (BSP) may still need to tighten monetary policy further despite weaker-than-expected economic growth in the first quarter, as persistent inflation pressures could pose a greater threat to the economy if left unaddressed, analysts said.
“A strong monetary response to inflation may still be needed despite the weak GDP (gross domestic product) print in the first quarter as inflation momentum continues to be strong,” Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. said in a commentary.
“While tighter monetary policy could weigh on economic activity by increasing the cost of financing capital expenditures, the damage caused by a prolonged period of elevated inflation may prove even more severe,” he added.
GDP growth slumped to 2.8 percent in the first three months of the year due to weakness in domestic activity, particularly in construction and consumer spending, amid growing uncertainty stemming from the ongoing conflict in the Middle East.
Despite the weaker growth print, Neri said inflation risks remain elevated due to persistently high oil prices, raising the possibility that the BSP may still need to deliver a “strong monetary response” to prevent inflation expectations from becoming entrenched.
“As such, a stronger monetary response may be warranted, with the possibility of an off-cycle rate hike remaining if oil prices continue to stay high,” he added.
Economic activity in the first quarter was heavily weighed down by a sharp contraction in construction spending. Government construction expenditures plunged 31.5 percent during the quarter following the reduction in the public works budget.
HSBC Global Research senior economist Aris Dacanay also said that persistently rising inflation is expected to keep economic growth under pressure in the remaining quarters of 2026.
“Regardless, we think a 50bps rate hike in June is still on the table for monetary policy,” Dacanay said.
The BSP policymaking body has raised key policy rates by a quarter-point last month due to higher inflation expectations.
Under the “adverse” scenario where oil prices stay at or above $100 per barrel until September, Dacanay said growth is expected to average 3.4 percent in 2026 as government spending slows and household consumption remains subdued.
“We continue to expect the Bangko Sentral ng Pilipinas (BSP) to continue its tightening cycle despite growth falling well below potential,” Dacanay said. “This is because of the principle of who can best do what.”
Dacanay argued the BSP’s main role is to limit the spillover effects of higher fuel and food prices by clearly signaling its commitment to keep inflation expectations anchored. He noted that with April inflation exceeding expectations, the impact of higher oil prices has come through faster than initially anticipated.
“A strong monetary response may be needed,” Dacanay said.
“Another alternative is for the central bank to smoothen its tightening cycle by opting to do an 'off-cycle' quarter point rate hike before the rate-setting meeting in June,” he added.
