THE Monetary Board will less likely raise the key interest rate at its last rate-setting meeting for the year if the output gap, following the third-quarter growth data release, turned out to be ‘too negative,’ according to the central bank governor.
‘[The] tightening or easing kasi it takes account of both inflation and growth. There is what is called an output gap, that’s the difference between our actual growth rate and potential growth rate. So if that is too negative, we are less likely to tighten,’ BSP Governor Eli M. Remolona Jr., said, partly in Filipino. The chairman of the Monetary Board, spoke to reporters on the sidelines of the ECCP Luncheon Meeting with the central bank governor on Tuesday.
Remolona also said the growth rate of the economy will be ‘taken into account’ in upcoming monetary policy decisions.
The BSP governor said he expects growth to recover by the fourth quarter of this year or by the first quarter of next year.
‘Our expectation is that recovery can start in Q4 or Q1 next year. So the government is trying very hard to accelerate spending,’ Remolona said.
Asked if he expects third-quarter (gross domestic product) GDP to be slower than the growth rate in the second quarter of the year, the central bank governor told reporters: ‘Hindi naman. Nagre-recover na [Not really. Recovery is ongoing].’
The Philippine Statistics Authority (PSA) reported that the second quarter growth slowed further to 2.3 percent from the 2.8 percent in the first quarter and was significantly below the 5.4-percent expansion recorded a year earlier.
The latest reading was the slowest since the first quarter of 2021, when the economy contracted by 3.8 percent. Excluding the pandemic period, it was the weakest growth recorded since the fourth quarter of 2009, when gross domestic product (GDP) expanded by 1.8 percent. (See: https://businessmirror.com.ph/2026/08/08/growth-at-2-3-in-q2-recovery-dims-in-2026/)
The PSA is scheduled to release the official third-quarter 2026 GDP data on November 9,2026 while the BSP’s Monetary Board will hold its last monetary policy meeting for the year on December 17,2026.
Negative output gap
Based on the central bank’s August 2026 Monetary Policy Report, the negative output gap is projected to widen in 2026 ‘due mainly to subdued private consumption and lower investment.’
‘Adverse economic sentiment is expected to weigh further on investment. Household consumption is likewise seen to remain muted in the near term, reflecting weaker income growth and elevated inflation,’ the report noted.
Meanwhile, the central bank’s report explained that government consumption could provide some relief in the second half of 2026, given the planned catch-up in infrastructure spending.
‘The output gap is thus seen to narrow in 2027,as investment and trade recover, and household consumption improve,’ the Monetary Policy Report noted.
In the report, the central bank explained that the output gap is a ‘summary indicator’ of the relative demand and supply conditions in the economy.
‘The output gap is inherently difficult to measure. Nonetheless, the BSP monitors this indicator to assess the degree of demand-based inflation pressure,’ the report noted.
Similarly, if actual output falls below potential output over time, reflecting ‘economic slack,’ the BSP said prices will begin to fall in response to weak demand relative to supply.
In a recent commentary, former BSP Deputy Governor Diwa C. Guinigundo said the negative output gap does not eliminate the need to tighten.
‘It does, however, argue for careful calibration,’ he pointed out. (See: https://businessmirror.com.ph/2026/10/22/bsp-cannot-afford-to-wait-til-risks-have-materialized/)
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Still in tightening cycle
Still, Remolona emphasized that the central bank remains in tightening mode, as inflation rate ‘doesn’t adjust so quickly.’
‘Easing? Not yet, we are still in tightening [mode] so we don’t know,’ Remolona responded, when was asked on when the next easing cycle may start.
Remolona explained that the BSP is adopting a ‘forward-looking’ policy.
‘So tinatantsa namin kung tama na, tuloy-tuloy na yung pagbaba ng inflation, so hindi na kami magta-tighten. [So we are estimating if it’s enough, if inflation will steadily go down, so we won’t have to tighten,’ he added.
In 2026, inflation peaked at 7.2 percent in April before easing to 6.8 percent in May, 6.4 percent in June, 6.2 percent in July and 6.1 percent in August. However, it peaked again in September-matching the 7.2 percent rate in April.
The MB has raised the key interest rate by a total of 125 basis points since the start of the conflict in the Middle East on February 28, delivering three separate quarter-point rate hikes at the Monetary Board’s rate-setting meetings held on April 23, June 18, and August 27; and a separate half-point rate hike on October 22.