The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

 

Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter—Ludwig von Mises 

In this issue

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

I. The Goldilocks Delusion: Rate Cuts as Ritual

II. Cui Bono: Government as the Primary Beneficiary

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge

IV. Minsky’s Warning: Fragility Beneath the Easing

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay

VIII. The War on Cash and the Politics of Liquidity

IX. The War on Cash Disguised as Corruption Control

X. From Cash Limits to Systemic Liquidity Locks

XI. The Liquidity Containment Playbook and the Architecture of Control

XII. Curve-Shaping and Fiscal Extraction

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis 

From rate cuts to cash caps: how the BSP’s containment playbook reshapes power and fragility in the Philippine economy

I. The Goldilocks Delusion: Rate Cuts as Ritual 

In delivering its “surprise” seventh rate cut for this August 2024 episode of its easing cycle, the BSP chief justified their decision on four grounds: 

• 1 Outlook for growth has softened in the near term
• 2 Growth was weaker because demand is weaker. This, in turn, is why inflation is low
• 3 Governance concerns on public infrastructure spending have weighed on business sentiment
• 4 “We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent.” 

For a supposedly data-dependent political-monetary institution, the BSP never seems to ask whether rate cuts have delivered the intended results—or why they haven’t. The rate-cut logic rests on a single pillar: the belief that spending alone drives growth. 

In reality, the BSP’s spree of rate and reserve cuts, signaling channels, and relief measures has produced a weaker, more fragile economy.

Figure 1

GDP rates have been declining since at least 2012, alongside the BSP’s ON RRP rates. Yet none of this is explained by media or institutional experts. These ‘signal channeling’ tactics are designed for the public to unquestioningly accept official explanations. (Figure 1, upper chart) 

II. Cui Bono: Government as the Primary Beneficiary 

Second, cui bono—who benefits most from rate cuts? 

The biggest borrower is the government. Its historic deficit spending spree hit an all-time high in 1H 2025, reaching a direct 16.71% share of GDP. This is supported by the second-highest debt level in history—ballooning to Php 17.468 trillion in August 2025—and with it, surging debt servicing costs. (Figure 1, lower window) 

As explained in our early October post: 

• More debt → more servicing → less for everything else
• Crowding out hits both public and private spending
• Revenue gains won’t keep up with servicing
• Inflation and peso depreciation risks climb
• Higher taxes are on the horizon 

The likely effect of headline “governance concerns” and BSP’s liquidity containment measures—via capital and regulatory controls—is a material slowdown in government spending. In an economy increasingly dependent on deficit outlays, this amplifies what the BSP chief calls a “demand slowdown.” 

In truth, the causality runs backward: public spending crowding out and malinvestments cause weak demand. 

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge 

Banks are the second biggest beneficiaries. Yet paradoxically, despite the BSP’s easing cycle, the growth rate of bank lending appears to have hit a wall.

Figure 2

Gross Non-Performing Loans (NPL) surged to a record Php 550 billion up from 5.4% in July to 7.3% in August. (Figure 2, topmost image)

Because lending growth materially slowed from 11% to 9.9% over the same period, the gross NPL ratio rose from 3.4% to 3.5%—the highest since November 2024. This is the Wile E. Coyote moment: credit velocity stalls and NPL gravity takes hold. 

As we noted in September: 

“Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold.” 

Even BSP’s own data confirms that the past rate cuts have barely permeated average bank lending rates. As of July 2025, these stood at 8.17%—still comparable to levels when BSP rates were at their peak (8.23% in August 2024). The blunting of policy transmission reveals deep internal imbalances. (Figure 2, middle graph) 

Production loans (9.8%) signaled the slowdown in lending, while consumer loans (23.4%) continued to sizzle in August. The share of consumer loans reached a historic 15.5% (excluding real estate loans). (Figure 2, lowest visual) 

IV. Minsky’s Warning: Fragility Beneath the Easing 

The BSP’s admission that the economy has softened translates to likely more NPLs and an accelerating cycle of loan refinancing. Whether on the consumer or supply side, this incentivizes rate cuts to delay a reckoning 

From Hyman Minsky’s Financial Instability Hypothesis, this deepens the drift toward Ponzi finance: insufficient cash flows from operations prompt recycling of loans and asset sales to fund mounting liabilities. (see Reference)

Figure 3

As major borrowers, lower rates also benefit banks’ own borrowing sprees. While banks trimmed their August bond and bill issuances (-0.79% YoY, -3.7% MoM, share down from 6.52% to 6.3%), both growth rates and shares remain on an uptrend. (Figure 3, topmost graph) 

The slowdown in bank borrowing stems from drawdowns from BSP accounts—justified by recent reserve rate ratio (RRR) cuts. BSP’s MAS reported a Php 242 billion bounce in liabilities to Other Depository Corporations (ODC) in August, reaching Php 898.99 billion. (Figure 3, middle diagram) 

Ultimately, the seventh rate cut—deepening the easing cycle—is designed to keep credit velocity ahead of the NPL surge, hoping to stall the reckoning or spark productivity-led credit expansion. Growth theater masks the real dynamics. 

Rate cuts today are less about the economy and more about survival management within the financial system. 

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide 

MSME lending—the most vital segment—continues to wane. Its share of total bank lending fell to a paltry 4.6% in Q2, the lowest since 2009. Ironically, MSME lending even requires a mandate. BSP easing has little impact here. (Figure 3, lowest visual) 

Some borrowers engage in wholesale lending or microfinancing—borrowing from banks to relend to SMEs. But if average bank lending rates haven’t come down, why would this segment benefit? 

Informal lenders, who fill the gap left by banks, absorb this risk—keeping rates sticky, as in the case of 5-6 lending. 

If lending to MSMEs remains negligible, who are the real beneficiaries of bank credit?

The answer: elite-owned, politically connected conglomerates.

Figure 4

In 1H 2025, borrowings of the 26 non-financial PSEi members reached a record Php 5.95 trillion—up Php 423.2 billion YoY, or 7.7%. That’s about 16.92% of total financial resources (TFR) as of June 2025. Bills Payable of the PSEi 30’s 4 banks jumped 64.55% YoY to P 859.7 billion. (Figure 4, topmost graph) 

This concentration is reflected in total financial resources/assets: Philippine banks, especially universal-commercial banks, hold 82.7% and 77.1% of total assets respectively as of July. 

Mounting systemic fragility is being masked by deepening concentration. A credit blowup in one major sector or ‘too big to fail’ player could ripple through the financial system, capital markets, interest rate channel, the USD–PHP exchange rate—and ultimately, GDP. 

The structure of privilege and fragility is now one and the same.

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation 

The BSP chief even admitted "demand is weaker. This, in turn, is why inflation is low."

Contrastingly, when authorities present their CPI data, the penchant is to frame inflation as a supply-side dynamic. Yet in our humble opinion, this marks the first time that the BSP confesses to a demand-driven CPI. 

September CPI rose for the second consecutive month—from 1.5% to 1.7%. If the ‘governance issues’ have exacerbated the demand slowdown, why has CPI risen? Authorities pointed to higher transport and vegetable prices as the culprit. 

Yet core CPI slowed from 2.7% in August to 2.6% in September, suggesting that the lagged effects of earlier easy money have translated to its recent rise. 

But that may be about to change. 

The drop in core CPI to 2.6% YoY was underscored by its month-on-month (MoM) movement, as well as the headline CPI’s MoM, both of which were flat in September. Historically, a plunge in MoM tends to signal interim peaks in CPI. (Figure 4, middle and lowest diagrams) 

So, while the unfolding data suggest that public spending may slow and bank lending continues to decelerate, “demand is weaker” would likely mean not only a softer GDP print but an interim “top” in CPI. 

If inflation reflects weak demand, labor data should show the same — yet the opposite is being claimed 

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay 

Authorities also produced another remarkable claim—on jobs.

Figure 5

They say employment rates significantly rebounded from 94.67% in July to 96.1% in August, even as the August–September CPI rebound supposedly showed that “demand is weaker.” This rebound was supported by a sudden surge in labor force participation—from 60.7% in July to 65.06% in August. (Figure 5, topmost and middle charts) 

The PSA’s employment data defies structural logic. Labor swings like stocks despite rigid labor laws and weak job mobility. The data also suggest that the wide vacillation in jobs indicates abrupt shifts between searching for work and refraining from doing so—as reflected in the steep changes in labor force participation. 

Furthermore, construction jobs flourished in August even amid flood-control probes, reflecting either delayed fiscal drag—or inflated data, to project immunity of labor markets from governance scandals. (Figure 5, lowest graph) 

Yet high employment masks poor-quality, low-literacy work—mostly in MSMEs—which explains elevated self-rated poverty and hunger rates. 

Additionally, both employment and labor force data have turned ominous: a rounding top in employment rates, while labor force participation also trends downward. 

Despite tariff woes, the slowdown in manufacturing jobs remains moderate. 

Nonetheless, beneath this façade, record consumer credit and stagnant wages reveal a highly leveraged, increasingly credit-dependent household sector. 

Labor narrative inflation—the embellishment of job metrics—would only exacerbate depressed conditions during the next downturn, leading to sharper unemployment. 

When investors interpret inaccurate data as fact, they allocate resources erroneously. The resulting imbalances won’t just show up in earnings losses—they’ll manifest as outright capital consumption. 

And while public spending may be disrupted, authorities can always divert “budget” caught in controversies to other areas. 

That said, jobs decay could rupture the banks propping up this high-employment illusion. 

VIII. The War on Cash and the Politics of Liquidity 

This week puts into the spotlight two developments which are likely inimical to the banking system, the economy and civil liberties. 

This Philstar article points to the banking system’s implementation of the BSP’s Php 500,000 withdrawal cap, which took effect in October. 

We earlier flagged seven potential risks from the BSP’s withdrawal limit: financial gridlock that inhibits the economy; capital controls that permeate into trade; indirect rescue of the banking system at the expense of the economy; possible confidence erosion in banks—alongside CMEPA; tighter credit conditions; rising risk premiums and capital flight; and, finally, the warning of historical precedent. (see reference) 

For instance, we wrote, "these sweeping limits target an errant minority while penalizing the wider economy. Payroll financing for firms with dozens of employees, capital expenditures, and cash-intensive investments and many more aspects of commerce all depend on such flows." 

The Philstar article noted, "Several social media users, particularly small business owners, expressed frustration over the stricter requirements and said that the P500,000 daily cash limit could disrupt operations and delay payments to suppliers."

Sentiment is yet to diffuse into economic numbers, but our underlying methodological individualist deductive reasoning is on the right track. 

IX. The War on Cash Disguised as Corruption Control

One of the critical elements in the BSP withdrawal cap is its requirement that the public use ‘traceable channels.’

The “traceable channels” clause reveals the BSP’s dual intent. 

On media, it’s about anti–money laundering and transaction transparency. In practice, it forces liquidity to remain inside the banking perimeter—deposits, e-wallets, and interbank transfers that cannot exit as cash. 

Cash, the last bastion of transactional privacy and immediacy, is being sidelined. This is not a war on crime; it’s a war on cash. 

The effect is to silo money within the formal system, preventing it from circulating freely across the real economy.

Figure 6

In August, cash-to-deposit at 9.84% remained adrift near all-time lows, while the liquid-asset-to-deposit ratio at 47.72% hit 2020 pandemic lows—both trending downward since 2013. (Figure 6, topmost pane) 

X. From Cash Limits to Systemic Liquidity Locks 

What looks like a compliance reform is, in truth, a liquidity containment measure. 

By capping withdrawals at Php 500,000, the BSP traps liquidity in banks already facing balance sheet strain. This buys temporary stability, allowing institutions to meet reserve ratios and avoid visible stress, but it starves the cash economy—especially small businesses dependent on operational liquidity. 

Economic losses eventually translate to non-performing loans, erasing whatever short-term relief liquidity traps provided. When firms struggle to repay, banks hoard liquidity to protect themselves—contracting credit and deepening the slowdown. The policy cure becomes the crisis catalyst. 

XI. The Liquidity Containment Playbook and the Architecture of Control 

This is not an isolated act; it fits a broader policy playbook: 

• Easy Money Policies: Reduce the cost of borrowing in favor of the largest borrowers, often at the expense of savers and small lenders. 
• CMEPA: The Capital Market Efficiency Promotion Act, which expands regulatory reach over capital flows and market behavior, while rechanneling private savings toward state and quasi-state instruments. 
• Soft FX Peg: The USDPHP peg, designed to constrain inflation, masks currency fragility and limits monetary flexibility. 
• Price Controls: MSRP ceilings distort price signals and suppress market clearing, especially in essential goods. 
• Administrative Friction: Regulatory hurdles replace fiscal support, extracting compliance and liquidity rather than injecting relief. 

Add to that the BSP’s ongoing yield curve-shaping—suppressing long-term yields to sustain public debt rollover—and what emerges is a clear strategy of financial containment: liquidity is captured, redirected, and immobilized to defend a strained financial order. 

XII. Curve-Shaping and Fiscal Extraction 

The post–rate cut yield curve behavior in the Philippines reveals a dual narrative that’s more tactical than organic. On one hand, the market is signaling unease about inflation—particularly in the medium term—yet it stops short of pricing in a runaway scenario. This ambivalence is reflected in the belly of the curve, where yields have dropped sharply despite flat month-on-month CPI and only modest year-on-year upticks. (Figure 6, middle and lowest graphs) 

On the other hand, the BSP appears to be engineering a ‘bearish steepening’ through tactical easing, likely aimed at supporting bank margins and stimulating credit amid a backdrop of rising NPLs, slowing loan growth, and liquidity hoarding. 

The rate cut, coming on the heels of July’s CMEPA and amid regulatory tightening, suggests a deliberate attempt to offset balance sheet stress without triggering overt inflation panic. 

Each of these measures—cash caps, regulatory absorption of savings, and engineered curve shifts—forms part of a single containment architecture. What looks like fragmented policy is, in reality, coordinated liquidity triage. 

In sum, fiscal extraction, liquidity controls, and curve manipulation are now moving in tandem. Each reinforces the other, ensuring that capital cannot easily escape the system even as trust erodes. 

The war on cash, then, is not about corruption or transparency—it’s about preserving liquidity in a system that has begun to run dry.

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost 

And then the BSP hopes to expand its extraction-based “reform.” This ABS-CBN article reports that the central bank plans to issue "a new policy on a possible threshold for money transfers which will cover even digital transactions." It would also empower banks to "refuse any transaction based on suspicion of corruption." 

Ironically, BSP Governor Eli Remolona cited as an example a contractor’s ‘huge’ withdrawal from the National Treasury—deposited into a private account—which he defended as "legitimate." 

The war on financials is evolving—from capital controls to behavioral nudging to arbitrary discretionary thresholds. BSP’s move to cap money transfers reframes liquidity as suspicion, and banks as moral adjudicators. 

Discretion to refuse transactions—even without proof—creates a regime where access to private property is conditional, not on law, but on institutional discomfort. 

Remolona’s defense of a bank that released a “huge amount” to a contractor despite unease confirms what we’ve recently argued: the scandal was never hidden—it was institutionally tolerated. 

Bullseye! 

Two revelations from this: 

First, it validates that this venal political-economic framework represents the tip of the iceberg—supported by deeply entrenched gaming of the system, extraction, and control born of top-heavy policies and politics. 

Two. It serves as a Kindleberger’s timeless signpost—that swindles, fraud, and defalcation are often signals of crashes and panic: 

"The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud." (Kindleberger, Bernstein)

In this sense, the BSP’s moralistic posture and arbitrary discretion may not be acts of reform, but symptoms of a system inching toward its own reckoning. The façade of prudence conceals a liquidity-starved order struggling to maintain legitimacy—where control replaces confidence, and “reform” becomes a euphemism for survival. 

All this suggests that, should implementation be rigorous, the recent earthquakes may not be confined geologically but could spill over into financial institutions and the broader economy. If these signify a “do something” parade of ningas cogon policies, then the moral decay born of the public spending spree will soon resurface. 

Either way, because of structural sunk costs, the effects of one intervention diffusing into the next guarantees the acceleration and eventual implosion of imbalances that—like a pressure valve—will find a way to ventilate. 

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

Finally, the BSP admits to either being afflicted by a knowledge problem or propagating a red herring: "We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent." 

This confession exposes the technocratic folly of believing that economic equilibrium can be engineered by formula. It ignores the fundamental truth of human action—there are no constants—and the perennial lesson of Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure. Protecting the status quo, therefore, translates to chasing short-term fixes while evading long-term consequences. 

What this reveals is not calibration but confusion—policy reduced to trial-and-error within a liquidity-starved system. The “Goldilocks” rhetoric masks a deeper instability: that each attempt to fine-tune the economy only amplifies the distortions born of past interventions. 

We close this article with a quote from our October issue: 

"The irony is stark. What can rate cuts achieve in “spurring demand” when the BSP is simultaneously probing banks and imposing withdrawal caps? 

And more: what can they do when authorities themselves admit that CMEPA triggered a “dramatic” 95-percent drop in long-term deposits, or when households are hoarding liquidity in response to new tax rules—feeding banks’ liquidity trap?" 

____

References 

Ludwig von Mises, Bureaucracy, p.119 NEW HAVEN YALE UNIVERSITY PRESS 1944, mises.org 

Hyman P. Minsky, The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College, May 1992 

Charles P Kindleberger & Peter L. Bernstein, The Emergence of Swindles, Manias Panics and Crashes, Chapter 5, p.73 Springer Nature link, January 2015 

Prudent Investor Newsletter, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 5, 2025 

Prudent Investor Newsletter, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, Substack, August 24, 2025 

Prudent Investor Newsletter, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025

 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

 

Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!, confidence collapses, lenders disappear, and a crisis hits—Carmen Reinhart and Kenneth Rogoff 

In this Issue 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth

III. The Pandemic Rescue Template Returns, The MSME Credit Gap

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design

V. Treasury Market Plumbing: Who Really Benefits?

VI. Crowding Out: Corporate Issuers in Retreat

VII. The Free Lunch Illusion: Debt and Servicing Costs

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

X. Conclusion: Goldilocks Faces the Three Bad Bears 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning 

The Bangko Sentral ng Pilipinas’ latest rate cut is a "Goldilocks" illusion masking a late-cycle reckoning driven by crowding out, surging leverage, and mounting stress in the financial system 

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion 

Reinforcing its "easing cycle," the Bangko Sentral ng Pilipinas (BSP) cut policy rates last week—the sixth reduction since August 2024. Officials claimed they had reached a “sweet spot” or “Goldilocks level”—a rate neither inflationary nor restrictive to growth, as the Inquirer reported. 

We’ve used “sweet spot” before, but not as a compliment. In our framing, it signals ultra-loose monetary policy—part of a broader “Marcos-nomics stimulus” package that fuses fiscal, monetary, and FX regimes into a GDP-boosting mirage. A rescue narrative sold as reform. 

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth 

The idea that “low rates equal growth” has calcified into public gospel. 

But if that logic holds, why stop at 5%? Why not abolish interest rates altogether—and for good measure, tax 100% of interest income? By that theory, we’d borrow and spend our way to economic utopia. In short: Such (reductio ad absurdum) logic reduces policy to absurdity: prohibit savings, unleash debt, and expect utopia.

Figure 1

The BSP insists its decisions are data-driven. But have they been? Since the 1998 Asian Crisis, rate cuts have been the default posture. 

And since the 2007–2009 Global Financial Crisis, each successive cut has coincided with slowing headline GDP—through the pandemic recession and beyond. The decline was marginal at first, barely noticed. But post-pandemic, the illusion cracked. (Figure 1 upper pane)

A historic rescue package—Php2.3 trillion in injections, rate cuts, RRR reductions, a USD-PHP soft peg, and sweeping relief measures—combined with unprecedented deficit spending, triggered a temporary growth spike. This extraordinary intervention, combined with global reopening, briefly masked structural weaknesses. 

But since 2021, GDP has resumed its downward drift, with the deceleration becoming conspicuous through Q2 2025. Inflation forced the BSP to hike rates, only to restart its easing cycle in 2024. 

So where is the evidence that low rates boost the economy?

III. The Pandemic Rescue Template Returns, The MSME Credit Gap 

Today’s “sweet spot” eerily mirrors the pandemic-era rescue template—minus the direct injections and relief measures. For now. 

Meanwhile, over half the population still self-identifies as borderline or poor (self-rated poverty surveys—SWS and OCTA). 

GDP, as a measure, fails to capture this disconnect—possibly built on flawed inputs, questionable categorization and assumptions, as well as politically convenient calculations. 

Meanwhile, the BSP’s easy money regime and regulatory bias have allowed banks to monopolize the financial system, now accounting for 83% of total financial assets as of Q2 2025. (Figure 1, lower graph) 

Yet MSMEs—the backbone of employment at 67% (as of 2023, DTI)—remain sidelined. 

Ironically, Republic Act No. 9501 mandates banks to lend 10% of their portfolio to MSMEs (8% to micro and small, 2% to medium enterprises).

Figure 2

But compliance has collapsed—from 8.5% in 2010 to just 4.63% in Q1 2025. (Figure 2, topmost image) 

Banks, unable to price risk appropriately, prefer paying penalties over lending to the sector. The result: the credit boom inflating GDP primarily benefits 0.37% of firms—the large enterprises that employ only a third of workers. 

While RA 9501 mandates banks to allocate 10% of their loan portfolio to MSMEs, BSP regulations restrict risk-based pricing—directly through caps on consumer and financing loans (BSP Circular 1133) and indirectly in MSME lending through microfinance rules (Circulars 272, 364, 409, and related issuances).   

Again, unable to fully price in higher default risks, banks often find it cheaper to pay penalties than to comply. 

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design 

At the same time, banks are aggressively expanding into consumer credit, while the unbanked majority continues to rely on the informal sector at usurious or punitive rates. 

Fintech e-wallets have gained traction, but they remain mostly transactional platforms. Banks, by contrast, are custodial institutions. Even if convergence is inevitable, bridging the informal credit gap will remain elusive unless rates reflect real distribution and collection risks.

This convergence may democratize leverage—but banks still dominate credit usage, reinforcing a top-heavy system. 

Deepening concentration, paired with price restrictions, resembles a cartel. A BSP-led cartel. 

And the first beneficiaries of this low-rate regime? Large enterprises and monied consumers. 

V. Treasury Market Plumbing: Who Really Benefits? 

And like any cartel, it relies not only on market power but also on control of the pipes—the very plumbing of the financial system, now evident in the Treasury market 

The Bangko Sentral ng Pilipinas has dressed up its latest rate cut as part of a “Goldilocks easing cycle,” but the bond market tells a different story.

Even before the policy shift, the Philippine BVAL Treasury yield curve had been flattening month after month, with long rates falling faster than the front end.  (Figure 2, middle and lower charts) 

That is not a picture of renewed growth but of markets bracing for a slowdown and disinflation. 

The rate cut simply ratified what the curve had preemptively declared: that the economy was softening, and liquidity needed to be recalibrated.

Figure 3

From the Treasury market’s perspective, the real beneficiaries weren’t households or corporates—they were institutional actors navigating a crowded, distorted market. 

Trading volumes at the Philippine Treasury market raced to all-time highs in August, just before and during the cut! (Figure 3, topmost diagram) 

This wasn’t retail exuberance—it was plumbing. 

BSP’s direct and indirect liquidity injections, coupled with foreign inflows chasing carry (data from ADB Online) amid global easing and macro hedges created a bid-heavy environment. The rate cut amplified this dynamic, lubricating government borrowing while sidelining private credit. (Figure 3, middle visual) 

VI. Crowding Out: Corporate Issuers in Retreat 

Meanwhile, the collateral damage is clear: corporate bond issuance has been trending downward, regardless of interest rate levels—both in nominal terms and as a share of local currency debt. (Figure 3, lowest window) 

This is evidence of the crowding-out syndrome, which suggests that BSP easing isn’t reviving private investment—it’s merely accommodating fiscal expansion. 

In the cui bono calculus, the winners of rate cuts are clear: the state, the banks, and foreign macro hedgers. 

The losers? Domestic firms, left behind in a market—where easing no longer means access. 

VII. The Free Lunch Illusion: Debt and Servicing Costs

Figure 4

The deeper reason behind the BSP’s ongoing financial plumbing lies in social democracy’s favorite illusion: the free lunch politics. 

Pandemic-era deficit spending has pushed public debt to historic highs (Php 17.27 trillion in June), and with it, the burden of debt servicing. (Figure 4, topmost chart) 

July’s figures—due next week—may breach Php 17.4 trillion. 

Even with slower amortizations temporarily easing the burden in 2025, interest payments for the first seven months have already set a record.

Rising debt means rising servicing obligations—even at the zero bound. The illusion of cheap debt is just that: an illusion. 

Crowding out isn’t just theoretical. 

It’s visible in the real economy—where MSMEs and half the population (per self-poverty surveys) are squeezed—and in the capital markets, where even the largest firms are feeling the pinch. 

The entropy in financial performance among PSE-listed firms, especially the PSEi 30, underscores that the spillover has reached even the politically privileged class. (see previous discussion—references) 

Monthly returns of the PSEi 30 similarly reflect the waning impact of the BSP’s cumulative easing measures since 2009. (Figure 4, middle image) 

In a world of scarcity, there is no such thing as a permanent free lunch. 

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing 

If the government is the brain of the political economy, banks are its heart. And the pulse is showing increasing signs of palpitations.

The banking system’s books reveal the scale of the plumbing, most visible in the record-high net claims on central government (NCoCG) held by the banking system and Other Financial Corporations (OFCs). 

Bank NCoCG surged 7.5% YoY to an all-time high Php 5.591 trillion in Q2 2025, pushing Held-to-Maturity (HTM) assets up 1.8% YoY to a milestone Php 4.075 trillion. (Figure 4, lowest graph)

Figure 5 

OFCs saw an even sharper jump—14.7% in Q1 to a record Php 2.7 trillion! (Figure 5, topmost diagram) 

According to the BSP, OFCs are composed of non-money market investment funds, other financial intermediaries (excluding insurance corporations and pension funds), financial auxiliaries, captive financial institutions and money lenders, insurance corporations, and pension funds. 

Yet despite these massive reallocations—and even with banks drawing a staggering Php 189 billion from their freed-up reserves (Claims on Other Depository Corporations) after March’s RRR cut—liquidity remains tight. (Also discussed last August, see references) (Figure 5, middle chart) 

Cash reserves continue to decline. Though cash-to-deposit ratios bounced in June from May’s all-time low, the trend remains downward—accelerating even as RRR rates fall to 5%. (Figure 5, lowest image) 

Liquid assets-to-deposit ratios have slumped to levels last seen in May 2020, effectively nullifying the supposed benefits of the BSP’s Php 2.3 trillion pandemic-era injections. 

This strain is now reflected in bank stocks and the financial index—dragging down the PSE and the PSEi 30. 

Goldilocks, eh? 

After the rate cut, the BSP immediately floated the possibility of a third RRR reduction—“probably not that soon.” Highly doubtful. Odds are it lands in Q4 2025 or Q1 2026. 

But even if the BSP dismantles the Reserve Requirement entirely, unless it confronts the root cause—the Keynesian dogma that credit-financed spending is a growth elixir—the downtrend will persist. 

At zero RRR, the central bank will run out of excuses. And the risk of bank runs will amplify.

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

Figure 6 

The toll on banks is already visible—profits are unraveling. From +10.96% in Q1 to -1.96% in Q2.  (Figure 6, upper visual) 

The culprit? 

Losses on financial assets—driven by surging provisions for credit losses, which ballooned 89.7% to Php 43.78 billion in Q2. That’s pandemic-recession territory—December 2020. (Figure 6, lower graph) 

X. Conclusion: Goldilocks Faces the Three Bad Bears 

The cat is out of the bag. 

The “stimulative effect” is a political smokescreen—designed to rescue banks and the elite network tethered to them. It’s also a justification for continued deficit spending and the rising debt service that comes with it. 

But “sweet spots” don’t last. They decay—subject to the law of diminishing returns. 

Paradoxically, under the Goldilocks fairy tale, there were three bears. In our case: three ‘bad’ bears:

• Crowding out and malinvestments
• Surging systemic leverage
• Benchmark-ism to sanitize worsening fundamentals 

Even the Bank for International Settlements has quietly replaced Philippine real estate pricing bellwethers with BSP’s version—one that paints booming prices over record vacancies. 

Nonetheless, the bears are already in the house. The porridge is cold. And the bedtime story is over. What remains is the reckoning—and the question of who’s prepared to face it without the comfort of fairy tales 

All signs point to a late-stage business cycle in motion. 

___

references 

Prudent Investor Newsletters, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, August 24, 2025 Substack 

Prudent Investor Newsletters, Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility, August 17, 2025 Substack

 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

 

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises 

In this issue

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch

I. Policy Easing in Question: Credit Concentration and Economic Disparity

II. Elite Concentration: The Moody's Warning and Its Missing Pieces

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives

IV. Market Rebellion: When Reality Defies Policy

V. The Banking System Under Stress: Evidence of a Rescue Operation

A. Liquidity Deterioration Despite RRR Cuts

B. Cash Crunch Intensifies

C. Deposit Growth Slowdown

D. Loan Portfolio Dynamics: Warning Signs Emerge

E. Investment Portfolio Under Pressure

F. The Liquidity Drain: Government's Role

G. Monetary Aggregates: Emerging Disconnection

H. Banking Sector Adjustments: Borrowings and Repos

I.  The NPL Question: Are We Seeing the Full Picture?

J. The Crowding Out Effect

VI. Conclusion: The Inevitable Reckoning 

A Rescue, Not a Stimulus: BSP’s June Cut and the Banking System’s Liquidity Crunch 

Despite easing measures, liquidity has tightened, markets have diverged, and systemic risks have deepened across the Philippine banking system. 

I. Policy Easing in Question: Credit Concentration and Economic Disparity 

The BSP implemented the next phase of its ‘easing cycle’—now comprising four policy rate cuts and two reductions in the reserve requirement ratio (RRR)—complemented by the doubling of deposit insurance coverage. 

The question is: to whose benefit? 

Is it the general economy? 

Bank loans to MSMEs, which are supposedly a target of inclusive growth, require a lending mandate and still accounted for only 4.9% of the banking system’s total loan portfolio as of Q4 2024. This is despite the fact that, according to the Department of Trade and Industry (DTI), MSMEs represented 99.6% of total enterprises and employed 66.97% of the workforce in 2023. 

In contrast, loans to PSEi 30 non-financial corporations reached Php 5.87 trillion in Q1 2025—equivalent to 17% of the country’s total financial resources. 

Public borrowing has also surged to an all-time high of Php 16.752 trillion as of April. 

Taken together, total systemic leverage—defined as the sum of bank loans and government debt—reached a record Php 30.825 trillion, or approximately 116% of nominal 2024 GDP. 

While bank operations have expanded, fueled by consumer debt, only a minority of Filipinos—those classified as “banked” in the BSP’s financial inclusion survey—reap the benefits. The majority remain excluded from the financial system, limiting the broader economic impact of the BSP’s policies. 

The reliance on consumer debt to drive bank growth further concentrates financial resources among a privileged few. 

II. Elite Concentration: The Moody's Warning and Its Missing Pieces 

On June 21, 2025, Inquirer.net cited Moody’s Ratings: 

"In a commentary, Moody’s Ratings said that while conglomerate shareholders have helped boost the balance sheet and loan portfolio of banks by providing capital and corporate lending opportunities, such a tight relationship also increases related-party risks. The global debt watcher also noted how Philippine companies remain highly dependent on banks for funding in the absence of a deep capital market. This, Moody’s said, could become a problem for lenders if corporate borrowers were to struggle to pay their debts during moments of economic downturn." (bold added) 

Moody’s commentary touches on contagion risks in a downturn but fails to elaborate on an equally pressing issue: the structural instability caused by deepening credit dependency and growing concentration risks. These may not only emerge during a downturn—they may be the very triggers of one. 

The creditor-borrower interdependence between banks and elite-owned corporations reflects a tightly coupled system where benefits, risks, and vulnerabilities are shared. It’s a fallacy to assume one side enjoys the gains while the other bears the risks. 

As J. Paul Getty aptly put it: 

"If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." 

In practice, this means banks are more likely to continue lending to credit-stressed conglomerates than force defaults, further entrenching financial fragility. 

What’s missing in most mainstream commentary is the causal question: Why have lending ties deepened so disproportionately between banks and elite-owned firms, rather than being broadly distributed across the economy?

The answer lies in institutional incentives rooted in the political regime. 

As discussed in 2019, the BSP’s trickle-down easy money regime played a key role in enabling Jollibee’s “Pacman strategy”—a debt-financed spree of horizontal expansion through competitor acquisitions. 

III. Why the Elite Bias? Financial Regulation, Market Concentration and Underlying Incentives 

Moreover, regulatory actions appear to favor elite interests. 

On June 17, 2025, ABS-CBN reported: 

"In a statement, the SEC said the licenses [of over 400 lending companies] were revoked for failing to file their audited financial statements, general information sheet, director or trustee compensation report, and director or trustee appraisal or performance report and the standards or criteria for the assessment." 

Could this reflect regulatory overreach aimed at eliminating competition favoring elite-controlled financial institutions? Is the SEC becoming a tacit ‘hatchet man’ serving oligopolistic interests via arbitrary technicalities? 

Philippine banks—particularly Universal Commercial banks—now control a staggering 82.64% of the financial system’s total resources and 77.08% of all financial assets (as of April 2025). 

Aside from BSP liquidity and bureaucratic advantages, political factors such as ‘regulatory capture’ and the ‘revolving door’ politics further entrench elite power. 

Many senior officials at the BSP and across the government are former bank executives, billionaires and their appointees, or close associates. Thus, instead of striving for the Benthamite utilitarian principle of “greatest good for the greatest number,” agencies may instead pursue policies aligned with powerful vested interests. 

This brings us back to the rate cuts: while framed as pro-growth, they largely serve to ease the cost of servicing a mountain of debt owed by government, conglomerates, and elite-controlled banks. 

Figure 1 

However, its impact on average Filipinos remains negligible, with official statistics increasingly revealing the diminishing returns of these policies. 

The BSP’s rate and RRR cuts, coming amid a surge in UC bank lending, risk undermining GDP momentum (Figure 1) 

IV. Market Rebellion: When Reality Defies Policy 

Even markets appear to be revolting against the BSP's policies!

Figure 2

Despite plunging Consumer Price Index (CPI) figures, Treasury bill rates, which should reflect the BSP's actions, have barely followed the easing cycle. (Figure 2, topmost window) 

Yields of Philippine bonds (10, 20, and 25 years) have been rising since October 2024 reinforcing the 2020 uptrend! (Figure 2, middle image) 

Inflation risks continue to be manifested by the bearish steepening slope of the Philippine Treasury yield curve. (Figure 2, lower graph)

Figure 3

Additionally, the USD/PHP exchange rate sharply rebounded even before the BSP announcement. (Figure 3, topmost diagram) 

Treasury yields and the USD/PHP have fundamentally ignored the government's CPI data and the BSP's easing policies. 

Importantly, elevated T-bill rates likely reflect liquidity pressures, while rising bond yields signal mounting fiscal concerns combined with rising inflation risks. 

Strikingly, because Treasury bond yields remain elevated despite declining CPI, the average monthly bank lending rates remain close to recent highs despite the BSP's easing measures! (Figure 3, middle chart) 

While this developing divergence has been ignored or glossed over by the consensus, it highlights a worrisome imbalance that authorities seem to be masking through various forms of interventions or "benchmark-ism" channeled through market manipulation, price controls, and statistical inflation. 

V. The Banking System Under Stress: Evidence of a Rescue Operation 

We have been constantly monitoring the banking system and can only conclude that the BSP easing cycle appears to be a dramatic effort to rescue the banking system. 

A. Liquidity Deterioration Despite RRR Cuts 

Astonishingly, within a month after the RRR cuts, bank liquidity conditions deteriorated further: 

·         Cash and Due Banks-to-Deposit Ratio dropped from 10.37% in March to 9.68% in April—a milestone low

·         Liquid Assets-to-Deposit Ratio plunged from 49.5% in March to 48.3% in April—its lowest level since March 2020 

Liquid assets consist of the sum of cash and due banks plus Net Financial assets (net of equity investments). Fundamentally, both indicators show the extinguishment of the BSP's historic pandemic recession stimulus. (Figure 3, lowest window) 

B. Cash Crunch Intensifies

Figure 4

Year-over-year change of Cash and Due Banks crashed by 24.75% to Php 1.914 trillion—its lowest level since at least 2014. Despite the Php 429.4 billion of bank funds released to the banking system from the October 2024 and March 2025 RRR cuts, bank liquidity has been draining rapidly. (Figure 4, topmost visual) 

C. Deposit Growth Slowdown 

The liquidity crunch in the banking system appears to be spreading. 

The sharp slowdown has been manifested through deposit liabilities, where year-over-year growth decelerated from 5.42% in March to 4.04% in April due to materially slowing peso and foreign exchange deposits, which grew by 5.9% and 3.23% in March to 4.6% and 1.6% in April respectively. (Figure 4, middle image) 

D. Loan Portfolio Dynamics: Warning Signs Emerge 

Led by Universal-Commercial banks, growth of the banking system's total loan portfolio slowed from 12.6% in March to 12.2% in April. UC banks posted a deceleration from 12.36% year-over-year growth in March to 11.85% in April. 

However, the banking system's balance sheet revealed a unmistakable divergence: the rapid deceleration  of loan growth. Growth of the Total Loan Portfolio (TLP), inclusive of interbank lending (IBL) and Reverse Repurchase (RRP) agreements, plunged from 14.5% in March to 10.21% in April, reaching Php 14.845 trillion. (Figure 4, lowest graph) 

This dramatic drop in TLP growth contributed significantly to the steep decline in deposit growth. 

E. Investment Portfolio Under Pressure

Figure 5

Banks' total investments have likewise materially slowed, easing from 11.95% in March to 8.84% in April. While Held-to-Maturity (HTM) securities growth slowed 0.58% month-over-month, they were up 0.98% year-over-year. 

Held-for-Trading (HFT) assets posted the largest growth drop, from 79% in March to 25% in April. 

Meanwhile, accumulated market losses eased from Php 21 billion in March to Php 19.6 billion in May. (Figure 5, topmost graph) 

Rising bond yields should continue to pressure bank trading assets, with emphasis on HTMs, which accounted for 52.7% of Gross Financial Assets in May. 

A widening fiscal deficit will likely prompt banks to increase support for government treasury issuances—creating a feedback loop that should contribute to rising bond yields. 

F. The Liquidity Drain: Government's Role 

Part of the liquidity pressures stem from the BSP's reduction in its net claims on the central government (NCoCG) as it wound down pandemic-era financing. 

Simultaneously, the recent buildup in government deposits at the BSP—reflecting the Treasury's record borrowing—has further absorbed liquidity from the banking system. (Figure 5, middle image) 

G. Monetary Aggregates: Emerging Disconnection 

Despite the BSP's easing measures, emerging pressures on bank lending and investment assets, manifested through a cash drain and slowing deposits, have resulted in a sharp decrease in the net asset growth of the Philippine banking system. Year-over-year growth of net assets slackened from 7.8% in April to 5.5% in May. (Figure 5, lowest chart) 

Figure 6

Interestingly, despite the cash-in-circulation boost related to May's midterm election spending—which hit a growth rate of 15.4% in April (an all-time high in peso terms), just slightly off the 15.5% recorded during the 2022 Presidential elections—M3 growth sharply slowed from 6.2% in March to 5.8% in April and has diverged from cash growth since December 2024. (Figure 6, topmost window) 

The sharp decline in M2 growth—from 6.6% in April to 6.0% in May—reflecting the drastic slowdown in savings and time deposits from 5.5% and 7.6% in April to 4.5% and 5.8% in May respectively, demonstrates the spillover effects of the liquidity crunch experienced by the Philippine banking system. 

H. Banking Sector Adjustments: Borrowings and Repos 

Nonetheless, probably because of the RRR cuts, aggregate year-over-year growth of bank borrowings decreased steeply from 40.3% to 16.93% over the same period. (Figure 6, middle graph) 

Likely drawing from cash reserves and the infusion from RRR cuts, bills payable fell from Php 1.328 trillion to Php 941.6 billion, while bonds rose from Php 578.8 billion to Php 616.744 billion. (Figure 6, lowest diagram) 

Banks' reverse repo transactions with the BSP plunged by 51.22% while increasing 30.8% with other banks. 

As we recently tweeted, banks appear to have resumed their flurry of borrowing activity in the capital markets this June. 

I.  The NPL Question: Are We Seeing the Full Picture? 

While credit delinquencies expressed via Non-Performing Loans (NPLs) have recently been marginally higher in May, the ongoing liquidity crunch cannot be directly attributed to them—unless the BSP and banks have been massively understating these figures, which we suspect they are. 

J. The Crowding Out Effect 

Bank borrowings from capital markets amplify the "crowding-out effect" amid growing competition between government debt and elite conglomerates' credit needs. 

The government’s significant role in the financial system further complicates this dynamic, as it absorbs liquidity through record borrowing. 

Or, it would be incomplete to examine banks' relationships with elite-owned corporations without acknowledging the government's significant role in the financial system. 

VI. Conclusion: The Inevitable Reckoning 

The deepening divergent performance between markets and government policies highlights not only the tension between markets and statistics but, more importantly, the progressing friction between economic and financial policies and the underlying economy. 

Is the consensus bereft of understanding, or are they attempting to bury the logical precept that greater concentration of credit activities leads to higher counterparty and contagion risks? Will this Overton Window prevent the inevitable reckoning? 

The evidence suggests that the BSP's easing cycle, rather than supporting broad-based economic growth, primarily serves to maintain the stability of an increasingly fragile financial system that disproportionately benefits elite interests. 

With authorities reporting May’s fiscal conditions last week (to be discussed in the next issue), we may soon witness how this divergence could trigger significant volatility or even systemic instability 

The question is not whether this system is sustainable—the data clearly indicates it is not—but rather how long political and regulatory interventions can delay the inevitable correction, and at what cost to the broader Philippine economy.