BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

 

A country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power—Charles Calomiris and Stephen Haber

In this issue

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut

II. The Primary Beneficiaries of BSP’s Policies

III. The Impact of the BSP Monetary Policy Rates on MSMEs

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

V. Logical Contradictions in the Philippine Banking Data

VI. Slowing Bank Asset Growth

VII. Booming Bank Lending—Magnified by the Easing Cycle

VIII. Economic Paradoxes from the BSP’s Easing Cycle

IX. Plateauing Investments and Rising Losses

X. Mounting Liquidity Challenges in the Banking System

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

BSP’s Fourth Rate Cut: Who Benefits, and at What Cost? 

As part of its ongoing easing cycle, the BSP cut rates for the fourth time in April 2025. The key question: who benefits? Clues point to trickle-down policies at work. 

I. Introduction: BSP’s Easing Cycle, Fourth Interest Rate Cut 

The Bangko Sentral ng Pilipinas (BSP) initiated its easing cycle in the second half of 2024, implementing three rate cuts and reducing the banking system’s Reserve Requirement Ratio (RRR) in October 2024. 

This was followed by a second RRR reduction in March 2025, complemented by the doubling of deposit insurance by the Philippine Deposit Insurance Corporation (PDIC), a BSP-affiliated agency, in the same month. 

The latter was likely intended to boost depositor confidence in the banking system, given the rapid decline in banks’ reserves amid heightened lending and liquidity pressures. (previously discussed) 

Last week, the BSP announced its fourth rate cut—the first for 2025—bringing the policy rate to 5.5%. 

The BSP justified this latest cut by citing the easing of inflation risks and a "more challenging external environment, which could dampen global GDP growth and pose downside risks to domestic economic activity." 

But who truly benefits from these policies? 

Or, we ask: Cui bono? 

The answer naturally points to the largest borrowers: the Philippine government, elite-owned conglomerates, and the banking system. 

Let’s examine the beneficiaries and question whether the broader economy is truly being served. 

II. The Primary Beneficiaries of BSP’s Policies 

The BSP’s easing measures disproportionately favor the following:

Figure 1

A. The Philippine Government: Public debt surged by Php 319.26 billion to a record PHP 16.632 trillion in February 2025.  Debt-to-GDP ratio increased to 60.72% in 2024, up from 60.1% in 2023. (Figure 1, topmost image) 

While debt servicing data for the first two months of 2025 appears subdued, it accounted for 7.64% of nominal GDP in 2024—a steady increase from its 2017 low of 4.11%. Between 2022 and 2024, the debt servicing-to-GDP ratio accelerated from 5.87% to 7.64%, reflecting the growing burden of rising debt.

Lower interest rates directly reduce the government’s borrowing costs, providing fiscal relief at a time of record-high debt, but they also encourage more debt-financed spending, a key factor contributing to this all-time high.

B. Elite-Owned Conglomerates: Major corporations controlled by the country’s elites have also seen their debt levels soar. 

For instance, San Miguel Corporation’s 2024 debt increased by Php 154.535 billion to a record Php 1.56 trillion, while Ayala Corporation’s debt rose by PHP 76.92 billion to PHP 666.76 billion. 

Other member firms of the PSEi 30 have yet to release their annual reports, but Q3 2024 data shows that the non-financial debt of the PSEi 30 companies grew by Php 208 billion, or 3.92%, to PHP 5.52 trillion—equivalent to 16.6% of Total Financial Resources (Q3).

These conglomerates benefit from lower borrowing costs, enabling them to refinance existing debt or fund expansion at cheaper rates, but similar to the government, their mounting loan exposure diverts financial resources away from the rest of the economy, exacerbating credit constraints for smaller firms. 

C. The Philippine Banking System: The banking sector itself is a significant beneficiary. 

In February 2025, aggregate bonds and bills payable surged by Php 560.2 billion—the fourth-highest increase on record—pushing outstanding bank borrowings to PHP 1.776 trillion, the second-highest level ever, just below January 2025’s all-time high of PHP 1.78 trillion. (Figure 1, middle pane)

Ideally, lower rates and RRR cuts provide banks with cheaper funding and more lendable funds, boosting their profitability while easing liquidity pressures. But have they? 

These figures reveal the primary beneficiaries of the BSP’s policies: the government, elite conglomerates, and the banking system.

III. The Impact of the BSP Monetary Policy Rates on MSMEs

But what about the broader economy, particularly the micro, small, and medium enterprises (MSMEs) that form its backbone?

Republic Act 9501, the Magna Carta for MSMEs, mandates that banks allocate at least 8% of their total loan portfolio to micro and small enterprises (MSEs) and 2% to medium enterprises (MEs), based on their balance sheets from the previous quarter.

However, a recent report by Foxmont Capital Partners and Boston Consulting Group (BCG), cited by BusinessWorld, highlights a stark mismatch: despite MSMEs comprising 99.6% of all businesses in the Philippines, generating 67% of total employment, and contributing up to 40% of GDP, they accounted for only 4.1% of total bank lending in 2023—a sharp decline from 8% in 2010.

As of Q3 2024, the BSP reported a total compliance rate with the Magna Carta for MSMEs stood at just 4.6%. (Figure 1, lower graph)

Despite a boom in bank lending, many banks opt to pay penalties for non-compliance rather than extend credit to MSMEs.

This underscores a harsh reality: bank lending remains concentrated among a select few—large corporations and the government—while MSMEs continue to be underserved.

All told, the BSP's policies have minimal impact on MSMEs, highlighting their distortive distributional effects

The report further echoes a "trickle-down" monetary policy critique we’ve long emphasized: the Philippine banking system is increasingly concentrated. Over 90% of banking assets are held by just 20 large banks, while more than 1,800 smaller institutions, primarily serving rural areas, collectively control only 9% of total assets!

Figure 2

This concentration is evident in the universal and commercial banks’ share of total financial resources, which stood at 77.7% in January 2025, slightly down from a historic high of 77.9% in December 2024. (Figure 2, topmost diagram)

If the BSP’s policies primarily benefit the government, banks, and elite conglomerates rather than the broader economy, why is the central bank pushing so hard to continue its easing cycle? And what have been the effects of its previous measures?

IV. The Inflation Story—Suppressed CPI as a Justification? Yield Curve Analysis

One of the BSP’s stated reasons for the April 2025 rate cut was a decline in the Consumer Price Index (CPI), with March headline CPI at 1.8%.

However, authorities have done little to explain to the public the critical role that Maximum Suggested Retail Prices (MSRPs)—essentially price controls—played in shaping this decline.

First, the government imposed MSRPs on imported rice on January 20, 2025, despite rice prices already contracting by 2.3% that month. (Figure 2 middle chart)

The second phase of rice MSRPs was implemented on March 31, despite rice prices deflating.

Second, pork MSRPs were introduced on March 10, 2025.

Pork inflation, which peaked at 8.5% in February, slipped to 8.2% in March, despite a reported compliance rate of only 25% in the National Capital Region (NCR).

Notably, pork sold in supermarkets and hypermarkets was exempt from these controls, revealing an inherent bias of policymakers against MSMEs. Were authorities acting as tacit sales agents for the former?

Third, since the introduction of these quasi-price controls, headline CPI has declined faster than core CPI (which excludes volatile food and energy prices), which printed 2.2% in March. (Figure 2, lowest window)

Food CPI, with a 34.78% weighting in the CPI basket, has likely been a significant driver of this decline, more so than core CPI.

This divergence suggests that price controls artificially suppressed headline inflation, masking underlying price pressures.

Meanwhile, the falling core CPI points to weak consumer demand, a concerning trend given the Philippines’ near-record employment rates.

Figure 3

Finally, the Philippine treasury market appears to challenge the BSP’s narrative of controlled inflation at 1.8% in March 2025.

Yield data shows a subtle flattening in the mid-to-long section of the curve: yields for 2- to 5-year maturities dipped slightly (e.g., the 5-year yield fell by 2.8 basis points from February 28 to March 31), while the 10-year yield rose by 6.75 basis points, and long-term yields, such as the 25-year, declined by 3.15 basis points. (Figure 3, topmost image)

This flattening—driven by a narrowing spread between medium- and long-term yields—may reflect market concerns about economic growth and banking system liquidity.

Despite this, the overall yield curve remains steep last March, signaling that the market anticipates inflation risks in the future.

This suggests that Treasury investors doubt the sustainability of the BSP’s inflation management.

We suspect that authorities leveraged price controls to justify the rate cut, using the suppressed CPI as a convenient metric rather than a true reflection of economic conditions.

This raises questions about the BSP’s transparency and the real motivations behind its easing cycle.

V. Logical Contradictions in the Philippine Banking Data

When you make a successful lending transaction, you get back not only your capital but the interest with it. Less costs, this income represents your profits and adds to your liquidity (savings or capital).

When you make a successful investment transaction, you get back not only your capital but the dividend or capital gains with it. Less costs, this income also represents your profits and adds to your liquidity (savings or capital).

Applied to the banking system, under these ideal circumstances, declared profits should align with liquidity conditions, but why does this depart from this premise?

Let us dig into the details. 

VI. Slowing Bank Asset Growth 

Bank total assets grew by 8% year-over-year (YoY) in February 2025 to PHP 26.95 trillion, slightly below December 2024’s historic high of PHP 27.4 trillion.  (Figure 3, middle pane)

Despite the BSP’s easing cycle, the growth in bank assets has been slowing, a downtrend that has persisted since 2013. This decline in the growth of bank assets has mirrored the falling share of cash reserves.

The changes in the share distribution of assets illustrate the structural evolution of the Philippine banking system.

As of February 2025, lending, investments, and cash represented the largest share, totaling 92.6%, broken down into 54.5%, 28.8%, and 8.8%, respectively. (Figure 3, lowest visual)

Since 2013, the share of cash reserves has been declining, bank loans broke out of their consolidation phase in July 2024 (pre-easing cycle), while the investment share appears to be peaking.

VII. Booming Bank Lending—Magnified by the Easing Cycle

The Total Loan Portfolio (inclusive of Interbank Loans (IBL) and Reverse Repurchase Agreements (RRP)) grew by 12.3% in February 2025, slightly down from 13.7% in January.

Since the BSP’s historic rescue during the pandemic recession, bank lending growth has been surging, regardless of interest rate and Reserve Requirement Ratio (RRR) levels. The recent interest rate and RRR cuts have only amplified these developments.

Figure 4

Notably, bank lending growth has become structurally focused on consumer lending, with the Universal-Commercial share of consumer loans rising to an all-time high as of February 2025. (Figure 4, topmost graph)

This shift is partly due to credit card subsidies introduced during the pandemic recession. This evolution in the banks’ business model also points to an inherent proclivity toward structural inflation: producers are receiving less financing (leading to reduced production and more imports), while consumers have been supplementing their purchasing power, likely to keep up with cumulative inflation.

In short, this strategic shift toward consumption lending underlines the axiom of "too much money chasing too few goods."

The rising loan-to-deposit ratio further shows that bank lending has not only outperformed asset growth, but ironically, these loans have not translated into deposits. (Figure 4, middle chart)

Total deposit liabilities growth slowed from 6.83% in January to 5.6% in February, driven by a slowdown in peso deposits (from 6.97% to 6.3%) and a sharp plunge in foreign exchange (FX) deposit growth (from 6.14% to 2.84%). (Figure 4, lowest window)

Peso deposits accounted for 82.7% of total deposit liabilities. Ironically, despite the USD-PHP exchange rate drifting near the BSP’s ‘upper band limit’ or its ‘Maginot Line’, FX deposit growth has materially slowed.

VIII. Economic Paradoxes from the BSP’s Easing Cycle 

Paradoxically, despite near-record employment levels (96.2% as of February 2025) and stratospheric loan growth propelled by consumers, the GDP has been stalling, with Q3 and Q4 2024 underperforming at 5.2% and 5.3%, respectively.

Real estate vacancies have been soaring—even the most optimistic analysts acknowledge this—and Core CPI has been plunging (2.2% in March 2025, as mentioned above).

Figure 5

Meanwhile, social indicators paint a grim picture: SWS hunger rates in March have hit near-pandemic milestones, and self-rated poverty, affecting 52% of families, has rebounded in March after dropping in January 2025 to 50% from a 21-year high of 63% recorded in December 2024. (Figure 5, topmost image) 

In a nutshell, where has all the fiat money created via loans flowed? What is the black hole consuming these supposedly profitable undertakings? 

IX. Plateauing Investments and Rising Losses 

The plateauing of investments is highlighted by their slowing growth rates. 

Total Investments (Net) decelerated from 5.85% in January to 4.86% in February 2025. This slowdown comes in the face of elevated market losses, which remained at PHP 26.4 billion in February, down from PHP 38.1 billion a month ago. (Figure 5, middle diagram) 

Held-to-Maturity (HTM) securities accounted for the largest share of Total Investments at 52.22%, followed by Available-for-Sale (AFS) securities at 38.5%, and Financial Assets Held for Trading (HFT) at 5.6%. 

Despite the CPI’s sharp decline, backed by the BSP’s easing, elevated Treasury rates—such as the 25-year yield at 6.3%—combined with losses in trading positions at the PSE (despite coordinated buying by the "national team" which likely includes some banks—to prop up the PSEi 30 index) have led to losses in banks’ trading accounts. 

Clearly, this is one reason behind the BSP’s easing cycle.

Yet, HTM securities remain the largest source of bank investments.

In early March 2025, we warned that the spike in banks’ funding of the government via Net Claims on Central Government (NCoCG) would filter into HTM assets: 

"Valued at amortized cost, HTM securities mask unrealized losses, potentially straining liquidity. Overexposure to long-duration HTMs amplifies these risks, while rising government debt holdings heighten banks’ sensitivity to sovereign risk. 

With NCoCG at a record high, this tells us that banks' HTMs are about to carve out another fresh milestone in the near future. 

In short, losses from market placements and ballooning HTMs have offset the liquidity surge from a lending boom, undermining the BSP’s easing efforts." (Prudent Investor, March 2025)

Indeed, the NCoCG spike to a record PHP 5.54 trillion in December 2024 pushed banks’ HTM holdings above their previous high of PHP 4.017 trillion in October 2023, breaking the implicit two-year ceiling of PHP 4 trillion to set a fresh record of PHP 4.051 trillion in February 2025. (Figure 5, lowest pane) 

This increase raised the HTM share of assets from 14.7% in January to 15.03% in February. 

X. Mounting Liquidity Challenges in the Banking System

Figure 6

This new all-time high in HTM securities led to a fresh all-time low in the cash-to-deposit ratio, meaning that despite the RRR cuts, cash reserves dropped more than the slowdown in deposit growth would suggest. (Figure 6, topmost chart)

The banking system’s cash and due from banks fell 2.94% in February to PHP 2.37 trillion, its lowest level since June 2019, effectively erasing all of the BSP’s unprecedented PHP 2.3 trillion cash injection in 2020-21. (Figure 6, middle graph)

Moreover, the liquid assets-to-deposits ratio, another bank liquidity indicator, dropped to June 2020 levels. (Figure 6, lowest visual)

The BSP cut the RRR in October 2024, yet liquidity challenges continue to mount. What, then, will the March 2025 RRR cut achieve? While the BSP notes that bank credit delinquency measures—such as gross non-performing loans (NPLs), net NPLs, and distressed assets—have remained stable, it’s doubtful that HTM securities are the sole contributor to the liquidity challenges faced by the banking system.

Improving mark-to-market losses are part of the story, but with record credit expansion (in pesos) and an all-time high in financial leverage amid a slowing GDP, it’s likely that the banks’ unpublished NPLs are another factor involved.

Figure 7

Additionally, banks have increasingly relied on borrowing, with bills payable accounting for 67% of their outstanding debt. (Figure 7, upper graph)

Though banks have reduced their repo exposure with the BSP, interbank repos set a record high in February 2025, providing further signs of liquidity strains. (Figure 7, lower chart)

Banks have been aggressively lending, particularly to high-risk sectors such as consumers, real estate, and trade, to raise liquidity to fund the government.

However, this has led to a build-up of HTM securities and sustained mark-to-market losses for HFT and AFS assets.

Additionally, lending to high-risk sectors like consumers and real estate increases the risk of defaults, particularly in a slowing economy, which can strain liquidity if these loans become non-performing.

Moreover, this lending exacerbates maturity mismatches—for instance, when short-term deposits are used to fund longer-term real estate loans—amplifying the liquidity challenges as banks face immediate funding demands with potentially impaired assets.

While the BSP’s “relief measures” may understate the true risk exposures of the industry, the mounting liquidity challenges and the increasing scale and frequency of their combined easing policies have provided clues about the extent of these risks.

Borrowing from our conclusion in March 2025:

"The BSP’s easing cycle has fueled a lending boom, masked NPL risks, and propped up government debt holdings, yet liquidity remains elusive. Cash reserves are shrinking, deposit growth is faltering, and banks are borrowing heavily to stay afloat.

...

As contradictions mount, a critical question persists: can this stealth loose financial environment sustain itself, or is it a prelude to a deeper crisis?" (Prudent Investor March 2025)

Under these conditions, the true beneficiaries of the BSP’s easing cycle become clear: it is primarily a rescue of the elite owned-banking system. 

XI. Conclusion: Unmasking the BSP’s Easing Cycle: A Rescue Mission with Hidden Costs 

The BSP has used inflation and external challenges to justify its fourth rate cut in April 2025, part of an easing cycle that began in the second half of 2024. 

The sharp decline in the March CPI rate to 1.8%—potentially understated due to price controls through Maximum Suggested Retail Prices (MSRPs)—may have provided a convenient rationale. 

However, the data suggests a different story: increasing leverage in the public sector, elite firms, and the banking system appears to be the real driver behind the BSP’s easing cycle, which also includes RRR reductions and the PDIC’s doubling of deposit insurance. 

The evidence points to a banking system under strain—record-low cash reserves, a lending boom that fails to translate into deposits, and economic paradoxes like stalling GDP growth despite near-record employment. 

When the BSP cites a "more challenging external environment, which would dampen global GDP growth and pose a downside risk to domestic economic activity," it is really more concerned about the impact on the government’s fiscal conditions, the health of the elite-owned banking system, and elite-owned, too-big-to-fail corporations. 

This focus comes at the expense of the broader economy, as MSMEs remain underserved and systemic risks, such as unpublished NPLs and overexposure to government debt, continue to mount. 

As the BSP prioritizes a rescue mission for its favored few, one must ask: at what cost to the Philippine economy, and can this trajectory avoid a deeper crisis?

 

 

 

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

 

Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver 

In this issue

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP?

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

IV. The USDPHP Cap: A Hidden CPI Subsidy

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right? 

With price controls driving February CPI down to 2.1%, the BSP’s easing narrative gains traction—yet treasury markets remain deeply skeptical

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

ABS-CBN News, March 5: Inflation eased to 2.1 percent in February because of slower price increases in food and non-alcoholic beverages, among others, the Philippine Statistics Authority said Wednesday. In a press briefing, the PSA said food inflation slowed to 2.6 percent in February from 3.8 percent in January. The state statistics bureau noted that rice inflation further slowed to -4.9 percent from -2.3 percent in January…But the PSA noted that pork prices jumped by 12.1 percent in February, while the price of chicken meat leapt by 10.8 percent.  The cost of passenger transport by sea also soared to 56.2 percent in February.  Del Prado said the African swine fever problem continue to hurt pork prices in the Philippines. She said, however, that the Department of Agriculture’s plan to impose a maximum suggested retail price on pork may help ease price hikes. 

The Philippine government recently announced that inflation unexpectedly dropped to 2.1% in February 2025. One official media outlet hailed it a "positive surprise" in its headline. 

But is this optimism warranted? 

While the Philippine Stock Exchange (PSE)—via the "national team"—welcomed this news, interpreting it as a sign that the Bangko Sentral ng Pilipinas (BSP) could continue its loose monetary policy—essentially providing a pretext for rate cuts—the more critical Philippine treasury markets, which serve as indicators of interest rate trends, appeared to hold a starkly different view. 

As an aside, the BSP’s reserve requirement ratio (RRR) cut takes effect this March 28th, adding fuel to the easing narrative. 

The odd thing is that a critical detail has been conspicuously absent from most media coverage: on February 3, 2025, authorities implemented the "Food Emergency Security" (FES) measure. 

This policy, centered on price controls—specifically Maximum Suggested Retail Prices (MSRP)—was supported by the release of government reserves. 

Consequently, February’s Consumer Price Index (CPI) reflects political intervention rather than organic market dynamics.

Figure 1

Even more telling is an overlooked trend: the year-on-year (YoY) change in the national average weighted price of rice had been declining since its peak in April 2024—well before the FES was enacted. (Figure 1, topmost graph) 

In a nutshell, the FES merely reinforced the ongoing downtrend in rice prices, serving more as an election-year tactic to demonstrate government action "we are doing something about rice prices," rather than an actual cause of the decline. 

Nevertheless, it won’t be long before officials pat themselves on the back and proclaim the policy a triumph. Incredible. 

But what about its future implications? 

Unlike rice, where government reserves were available to support price controls, the impending implementation of MSRP for pork products next week lacks similar supply-side support. This suggests that any price stabilization achieved will be short-lived. (Figure 1, middle chart) 

As noted in February,  

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Prudent Investor, 2025)  

Nevertheless, manipulating statistics serves a political function—justifying policies through "benchmark-ism."  

Beyond food prices, which dragged down the headline CPI, core CPI also eased from 2.6% in January to 2.4% in February. 

Despite this pullback, the underlying inflation cycle appears intact. (Figure 1, lowest image) 

Government narratives consistently frame inflation as a ‘supply-side’ issue or blame it on "greedflation," yet much of their approach remains focused on demand-side management through BSP’s inflation-targeting policies. 

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP? 

Authorities claim that employment rates have recently declined but remain near all-time highs. 

But how true is this?

Figure 2

The employment rate slipped from an all-time high of 96.9% in December 2024 to 95.7% in January 2025—a level previously hit in December 2023 and June 2024. (Figure 2, topmost image) 

Remarkably, despite near-full employment, the CPI continues to slide. 

Officials might argue this reflects productivity gains.  But that claim is misleading.

Consumer credit growth—driven by credit cards and supported by salary loans—has been on a record-breaking tear, rising 24.4% YoY in January 2025, marking its 28th consecutive month above 20%. (Figure 2, middle window) 

Yet, unlike the 2021-2022 period, headline CPI has weakened. 

Could this signal diminishing returns—mainly from refinancing? 

Beyond CPI, total Universal-Commercial (UC) bank loans have surged since Q1 2021—unfazed by official interest rate levels. (Figure 2, lowest diagram)

Figure 3

The slowing growth in salary loans seems to mirror the CPI’s decline. (Figure 3, upper pane) 

And it’s not just inflation. 

Despite an ongoing surge in Universal-Commercial (UC) bank loans since Q1 2021—regardless of official interest rate levels—weak consumption continues to weigh on GDP growth. The second half of 2024 saw GDP growth slow to just 5.2%. (Figure 3, lower chart) 

This boom coincides with record real estate vacancies, near unprecedented hunger rates, and almost milestone highs in self-reported poverty. 

So, where has demand gone? 

In January 2025, UC bank loans (both production and consumer) increased by 13.27% year-on-year. 

Are the government’s employment figures an accurate reflection of labor market conditions? Or, like CPI data, are they another exercise in "benchmark-ism" designed to persuade voters and depositors that the political economy remains stable? 

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

Figure 4 

Ironically, bank financing of the government, as reflected in Net Claims on the Central Government (NCoCG), continues to soar—up 7.4% year-on-year to PHP 5.41 trillion in January 2025, though slightly down from December 2024’s historic PHP 5.54 trillion. 

Meanwhile, since bottoming at 1.5% in April 2023, BSP currency issuance has trended upward, accelerating from May 2024 to January 2025, when it hit 11% YoY. (Figure 4, topmost graph) 

Despite this massive liquidity injection—via bank lending and government borrowing—deflationary forces persist in the CPI. 

Where is this money flowing? What "financial black hole" is absorbing the injected liquidity? 

IV. The USDPHP Cap: A Hidden CPI Subsidy 

The recent weakness of the US dollar—primarily due to a strong euro rally following U.S. President Trump’s pressure on Europe to increase NATO contributions—has driven up the region’s stock markets, particularly defense sector stocks. This, in turn, has triggered a global bond selloff.

The euro’s strength has also bolstered ASEAN currencies, including the Philippine peso. 

As predicted, the BSP’s cap on the USD-PHP exchange rate— a de facto subsidy—has fueled an increase in imports. In January, the nation’s trade deficit widened by 17% to USD 5.1 billion due to a 10.8% jump in imports. (Figure 4, middle window) 

Further, to defend this cap, the BSP sold significant foreign exchange (FX) in January, only to replenish its Gross International Reserves (GIR) in February via a USD 3.3 billion bond issuance. The BSP attributes the GIR increase to "(1) national government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, (2) upward valuation adjustments in the BSP’s gold holdings due to the increase in the price of gold in the international market, and (3) net income from the BSP’s investments abroad." (Figure 5, lowest visual) 

This disclosure confirms the valuable role of gold in the BSP’s reserves. 

In short, the USD-PHP cap has not only subsidized imports but has also artificially suppressed the official CPI figures. 

From 2015 to 2022, the ebbs and flows in the USD-PHP exchange rate were strongly correlated with CPI trends.  

Figure 5

However, since 2022, when the exchange rate cap was strictly enforced, this relationship has broken down, increasing pressure on the credit-financed trade deficit and necessitating further borrowing to sustain both the cap and the Gross International Reserves (GIR). (Figure 5, topmost image) 

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

First, while global bond yields have risen amid the European selloff, this has not been the case for most ASEAN markets—except for the Philippines. This suggests that domestic factors have been the primary driver of movements in the ASEAN treasury markets, including the Philippines. (Figure 5, middle and lowest graphs)

Figure 6

Second, it is important to note that institutional traders dominate the Philippine treasury markets. This dynamic creates a distinction between the public statements of their respective "experts" and the actual trading behavior of market participants—"demonstrated preferences." 

The apparent divergence between the CPI and Philippine 10-year bond yields—despite their previous seven-year correlation—reveals disruptions caused by other influencing factors. (Figure 6, upper chart) 

Or, while analysts often serve as institutional cheerleaders for the traditional market response to an easing cycle, traders seem to be reacting differently.

Finally, further cementing this case for decoupling, the Philippine yield curve steepened (bearish steeper) during the week of the CPI announcement—suggesting that treasury markets are pricing in future inflation risks or tighter policy, potentially discounting the recent CPI decline as temporary. (Figure 6, lowest graph) 

All in all, while the government and the BSP claim to have successfully contained inflation, treasury markets remain highly skeptical—whether about the integrity of the data, the sustainability of current policies, or both. 

Our bet is on the latter.

___

References  

Prudent Investor, January 2025 2.9% CPI: Food Security Emergency andthe Vicious Cycle of Interventionism February 10, 2025

 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

  

The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters—Ludwig von Mises 

In this issue

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction

II. January 2025 2.9% CPI: Key Highlights

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

IV. Baseline Changes: Engineering GDP Growth

V. The Falling Rice Prices: Why the Food Emergency Security?

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism

VII. Treasury Markets Are Already Telegraphing Inflation Risk

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices?

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks 

January 2025 2.9% CPI: Food Security Emergency and the Vicious Cycle of Interventionism

I. Introduction 

·         January’s CPI provided a temporary breather against the looming risk of an inflation rebound.

·         Despite falling rice prices, authorities pushed forward with a Food Security Emergency—one in a series of interventions aimed at suppressing CPI in the short term.

·         Meanwhile, rising domestic and external debt, coupled with declining foreign reserves (GIR), amplify risks of peso devaluation and feeding the inflation cycle.

II. January 2025 2.9% CPI: Key Highlights 

Businessworld, February 6, 2025: HEADLINE INFLATION remained steady in January as lower utility costs offset a spike in food prices, preliminary data from the Philippine Statistics Authority (PSA) showed. It also settled within the 2.5%-3.3% forecast from the Bangko Sentral ng Pilipinas (BSP). The January print was also slightly higher than the 2.8% median estimate in a BusinessWorld poll of 16 analysts... Core inflation, which discounts volatile prices of food and fuel, settled at 2.6% during the month — slower than 2.8% in December and 3.8% a year ago…On the other hand, rice inflation contracted to 2.3% in January from the 0.8% clip in December and 22.6% jump a year prior. (bold added) 

Nota Bene: As of January, the BSP has yet to release data on bank lending, liquidity conditions, and its central bank survey. This leaves us with the January CPI—interpreted through the lens of what the government intends to highlight: supply-driven inflation!

Figure 1 

Momentum: January’s data suggests stalling momentum in the year-over-year (YoY) change for both headline and core CPI. 

However, a trend analysis of the month-over-month (MoM) change reveals that while headline CPI remains above the upper boundary of its trend line, core CPI remains rangebound, albeit slightly lower than recent highs. (Figure 1, topmost image)

Bottoming Phase? These MoM rates suggest a bottoming phase. It remains uncertain whether this will remain rangebound or break to the upside, requiring further confirmation.

Uptrend of the Third Wave of the Inflation Cycle Intact. Nonetheless, the broader uptrend in the 10-year headline and core CPI remains intact. In fact, MoM trends reinforce the case for a bottoming—a potential launching pad.

It's important to remember that this CPI backdrop occurs amidst the BSP's pursuit of easy money policies since the second half of 2024. This is coupled with a series of all-time highs in bank credit expansion and a near-record unemployment rate in December 2024. (Figure 1, middle and lowest charts)

Figure 2

Level vs. Rate of Change. It is a misimpression to state that January's CPI is at the same level as December's. While the rate of change may be the same, the level is definitively not.

The Philippine Statistics Authority's (PSA) nominal prices determine the level, whereas the CPI figures represent the base-effect represented in percentages. (Figure 2, topmost graph)

The nominal rates also reveal the cumulative effects of the CPI. Even if growth rates stall or decrease (slow), the continued increase in general prices persists.

This leads to sustained hardship, especially for those living on the margins.

III. The Government’s Convenient Attribution Bias: The Typhoon Fallacy

Authorities often employ self-serving attribution bias—crediting successes to internal factors while attributing failures to external ones—to explain economic phenomena. For instance, they attribute recent food price increases to 'typhoons/weather disturbances' or diseases like African Swine Fever.

The Philippines experiences an average of 20 typhoons annually. If the establishment's logic were consistently true, food prices should be perpetually elevated.

A review of the 10 worst typhoons to hit the country—events that, according to the establishment narrative, should have triggered inflation surges—shows little correlation with CPI spikes. In fact, food CPI exhibited a downtrend in seven of the nine years when these devastating typhoons occurred (the other two took place in 2020). (Figure 2, middle pane)

But, of course, the vulnerable public is expected to accept the official narrative without question—because the echo chamber insists on it!

IV. Baseline Changes: Engineering GDP Growth

Policymakers are always seeking ways to justify their free-lunch economic policies. 

Now, they are signaling a change in the baseline rates of the most sensitive data—particularly the CPI and the GDP—starting in 2026.

Inquirer.net, February 6, 2025: The Philippine Statistics Authority (PSA) will change again the base year used to calculate inflation and gross domestic product (GDP) so that key data could better capture the latest economic conditions.

This adjustment, while technical in nature, conveniently offers a tool for reshaping inflation narratives, making future price pressures appear more benign.

Well, if history serves as a guide, "could better capture the latest economic conditions" often implies adjusting baseline rates to lower the CPI. Comparing the CPI with an overlap of the 2006 and 2018 baselines reveals a significant difference, with the 2018 baseline showing a markedly lower CPI. (Figure 2, lowest diagram)

The BSP still publishes data series from 2000, 2006, 2012, and 2018.

Fundamentally, a high Nominal GDP (NGDP) when calculated against a reduced CPI (as a deflator or implicit price index) results in a HIGHER headline GDP! Voilà! A statistical boom! 

Will the Philippine government achieve its coveted "middle-income status" economy by inflating its statistics? 

V. The Falling Rice Prices: Why the Food Emergency Security?

Authorities also claim that "rice inflation contracted to 2.3% in January from the 0.8% clip in December." 

If this is the case, why the sudden need for a Food Emergency Security (FES) program, which includes light-handed price controls (a maximum Suggested Retail Price) and the release of the National Food Authority’s "buffer rice" or reserves?

Figure 3

If anything, these interventions have temporarily suppressed CPI in the short term. 

In any case, here is a timeline of political interventions in the food and agricultural industry, which should serve as template. 

February 15, 2019: GMA News: Duterte signs rice tariffication bill into law

March 11, 2020: DTI: Nationwide price freeze on basic necessities in effect amid COVID-19 emergency 

February 2, 2021: Inquirer: DA: Price ceiling on pork, chicken products to start on Feb. 8

April 8, 2021: Portcalls: Duterte signs EO lowering tariff for pork imports 

June 1 2024: DTI: DTI secures voluntary price freeze commitments for more basic necessities 

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Figure 3, topmost graph)

Ironically, the easing of interventions may have contributed to the decline in CPI from the end of 2022 to mid-2024. 

VI. The Rice Ceiling Trap: A Self-Inflicted Supply Crisis and the Vicious Cycle of Interventionism 

Price ceilings create artificial demand spikes. With buffer stocks being released into the market, their rapid depletion seems inevitable. This means authorities will soon have to replenish reserves—betting that global rice prices remain stable. (Figure 3, middle window)

But even if global rice prices decline, large-scale stockpiling would exacerbate the twin deficits (fiscal and trade deficits). The agricultural sector reported near milestone trade deficit in Q3 2024. (Figure 3, lowest image)

This, in turn, would put additional pressure on the USD-PHP exchange rate, where further peso depreciation would translate into higher import costs, which would help feed into the current inflation cycle.

And now, the Department of Agrarian Reform (DAR) is considering imposing FES on pork prices as well!

It appears authorities believe they can override market dynamics and economic laws through sheer force of policy. But history has shown time and again that such attempts only lead to greater imbalances—necessitating even more interventions in an endless loop of self-inflicted crises.

Good luck to the believers!

VII. Treasury Markets Are Already Telegraphing Inflation Risk

The Philippine Treasury markets are already reflecting this narrative.

Figure 4

The yield curve continues to fall, leading to a bull steepening—a clear signal that the BSP is likely to cut rates. (Figure 4, topmost graph)

While this may provide short-term relief, it also carries risks: looser monetary policy could reignite inflationary pressures while signaling heightened economic uncertainty. 

VIII. The Contradiction: Why a Food Security Emergency Amid Falling Prices? 

If rice prices are declining and core CPI is slowing, why are authorities aggressively pushing a Food Emergency Security (FES) program? 

The short answer: they want their free lunches to continue. 

Whether through subsidies, price controls, or other interventionist policies, they are ensuring a steady flow of populist measures. 

By the way, the National mid-term Election is in May! 

Importantly, this push signifies a calculated move to secure easier access to cheap credit—leveraging monetary easing to sustain economic illusions. 

IX. 2024 Fiscal Snapshot: Rising Debt, the Trade-Off for 5.6% GDP 

The Bureau of the Treasury (BTr) has yet to release its cash operations report for February 28, limiting our full-year assessment of fiscal health. 

Still, while public debt eased slightly from Php 16.09 trillion in November to Php 16.05 trillion in December, total 2024 public debt closed at an all-time high. 

While the consensus was previously pleased that a slowing deficit had led to a decrease in net debt increases, 2024 experienced "a 9.8% or Php 1.44 trillion increase from the end-2023 level."  (Figure 4, middle chart)

The Bureau of Treasury (BTr) further reported that the "corresponding debt-to-GDP ratio of 60.7% was slightly above the 60.6% revised Medium-Term Fiscal Framework estimate, on account of the lower-than-expected full-year real GDP growth outcome of 5.6%" (Figure 4, lowest diagram)

Yet, this debt increase came despite a supposedly “restrained” deficit—largely due to (potential) record government spending in 2024. 

Put simply, the Php 1.44 trillion debt increase was the trade-off for achieving 5.6% GDP growth. 

There is a cost to everything. 

Yet, the full cost of debt servicing has yet to be published. 

Crucially, this 5.6% GDP growth was artificially fueled by: 

-BSP’s easy money policies,

-Record public spending,

-All-time high public debt,

-Historic bank credit expansion, and

-Near full employment.

Any reversal of these factors—or even a partial pullback—could WIDEN the fiscal deficit to new highs and PUSH debt-to-GDP further upward. 

There is more.

X. Mounting Risks of Philippine Peso Devaluation and Inflation Risks

Figure 5

External debt jumped 11.4% in 2024, reaching an all-time high of Php 5.12 trillion. 

Its share of total debt rose for the third consecutive year, now at 31.9%—partly due to peso depreciation but mostly from fresh borrowings totaling Php 401.7 billion. (Figure 5, topmost chart)

Meanwhile, BSP’s January 2025 Gross International Reserves (GIR) shrank by $3.24 billion—its steepest decline since September 2022. This was largely due to their defense of the Philippine peso, even though USD/PHP barely hit 59. (Figure 5, middle pane)

The BSP appears to have adjusted its intervention ceiling or their "upper band" to around 58.7. 

Falling GIR is a price to pay for the USD/PHP peg. (discussed last January)

And remember, 'ample reserves' have barely slowed the USDPHP's juggernaut. (Figure 5, lowest chart)

The BSP also revealed another reason for the GIR decline was a "drawdown on the national government’s (NG) deposits with the BSP to pay off its foreign currency debt obligations." 

Adding another layer of irony, the Philippine government raised $2.25 billion and €1 billion on January 24th. These fresh funds may temporarily boost February’s GIR, reflecting the National Government’s deposits with the BSP. 

Going forward, the government will require even more foreign exchange to service its external debt over time. This suggests continued reliance on foreign borrowing—expanding the BTr’s outstanding FX debt stock and increasing the risk of further peso depreciation. 

With growing dollar scarcity, the BSP’s need to refinance public debt, and the rising FX debt appetite of elite institutions, the government and central bank path-dependence on liquidity injections via easy money and fiscal stimulus have only deepened. 

This, in turn, heightens inflation risks—potentially fueling the third wave of the present inflation cycle. 

Take heed.