The Philippine Central Bank's Playbook: How Lower Rates Could Turn Trade War Headwinds into Investment Tailwinds

The trade wars are getting worse, and the Philippines is fighting back—by cutting interest rates. While global growth stumbles under the weight of tariffs and protectionism, the Bangko Sentral ng Pilipinas (BSP) is taking a bold, “baby steps” approach to monetary easing. But here’s the catch: this isn’t just about keeping up with inflation—it’s a calculated bet that cheaper money can offset the pain of trade disputes.

The Trade War’s Toll on Growth

The International Monetary Fund (IMF) has slashed its 2025 GDP forecast for the Philippines to 5.5%, down from 6.1%, citing U.S. tariffs as a key culprit. A 17% tariff on Philippine exports to the U.S. has hit sectors like electronics and agriculture, while global demand sags under broader trade tensions. Yet, the BSP isn’t panicking—it’s betting on low inflation (currently 2.2%) to carve space for rate cuts.

How the BSP is Playing Defense—and Offense

Since May 2025, the BSP has slashed its benchmark rate by 25 basis points to 5.5%, with more cuts likely this year. Governor Eli Remolona’s mantra? “Data-dependent” adjustments. With inflation comfortably within target and global fuel/food prices subdued, the central bank is easing now to preempt a sharper slowdown.

But here’s the twist: this isn’t just about stimulating growth. By keeping rates low, the BSP is also shielding the peso from depreciation—a critical move as trade wars risk destabilizing currencies. A weaker peso would spike import costs, reigniting inflation. The central bank’s tightrope walk is paying off so far, but risks loom.

The Risks: Trade Wars Could Still Backfire

The BSP’s playbook hinges on two assumptions: 1) tariffs won’t escalate further, and 2) global supply chains stay intact. But what if China slaps retaliatory duties on Philippine goods, or climate disasters disrupt trade routes? The IMF warns that supply chain disruptions or currency volatility could push inflation to 3.5%—testing the BSP’s “accommodative” stance.

Where to Invest in This Environment

The Philippines remains Asia’s second-fastest-growing economy, trailing only India. Here’s where investors should focus:
1. Consumer Staples: Low rates boost household spending. Companies like Jollibee Foods (JFC) or Uni-President (UPHOLD) could thrive as inflation stays tame.
2. Real Estate: Cheaper borrowing fuels construction. Manila’s office and residential markets are already heating up, with developers like Ayala Land (ALI) benefiting from rate cuts.
3. Export-Resilient Sectors: Focus on industries less exposed to U.S. tariffs, like healthcare (Philippine Long Distance Telephone, PLDT) or renewable energy (AC Energy).

Conclusion: A Cautionary Bull Case

The BSP’s easing cycle is a masterstroke—if the trade war doesn’t spin out of control. With inflation under wraps and growth still outpacing regional peers (Vietnam’s 5.2%, Indonesia’s 4.7%), the Philippines is a contrarian bet in a slowing world.

But investors must stay vigilant. If the U.S.-China trade war escalates or inflation spikes past 3%, the BSP’s “baby steps” could turn into a sprint toward higher rates—crushing stocks. For now, though, the data says go: the PSEi (Philippine Stock Exchange Index) has risen 8% since May’s rate cut, and the BSP’s cautious hand is keeping the ship afloat.

In a world of trade wars and tariffs, the Philippines isn’t just surviving—it’s playing offense. But don’t blink: this rally could be as fragile as the trade deals it’s relying on.