Philippine Equities: Riding the Wave of Monetary Easing Amid Tame Inflation

In a significant move that underscores the Philippines' shifting economic priorities, the Bangko Sentral ng Pilipinas (BSP) cut its benchmark interest rate by 25 basis points to 5.25% on June 19, 2025. This decision marks a pivotal moment in the country's monetary policy trajectory, as the central bank pivots decisively toward supporting growth amid a global slowdown. With inflation now at its lowest level in over five years—1.3% in May—the door is wide open for further easing, creating a fertile backdrop for Philippine equities to shine.

The Inflation Dynamic: A Tamer Landscape

The May 2025 inflation print of 1.3%—the lowest since November -2019—reflects a confluence of factors. Transport costs, which account for nearly 10% of the consumer price index (CPI), fell sharply as oil prices retreated to $75 per barrel, down from $85 in early 2025. Meanwhile, utilities and housing expenses eased further due to lower electricity generation costs and a 4% appreciation of the Philippine peso against the U.S. dollar year-to-date. These trends have anchored inflation expectations, with the BSP now forecasting average annual inflation of just 1.6% for 2025, down from its earlier 2.4% estimate.

However, risks linger. Localized supply chain disruptions in vegetables and meat—driven by typhoon-related harvest delays and rising global feedstock costs—could push food prices higher. The BSP remains cautious but prioritizes growth over short-term volatility.

Monetary Policy: A Growth-Focused Turn

The June rate cut was no surprise, but its timing and rationale reveal a strategic shift. The BSP cited “manageable inflation pressures” and a “downside risk to global growth” as key drivers, explicitly prioritizing economic expansion over inflation targeting. This marks a departure from its 2023 stance, when the central bank hiked rates to curb overheating domestic demand.

The decision aligns with the BSP's updated forward guidance: with real interest rates (nominal rates minus inflation) now at 4%, among the highest in Asia, further easing is both warranted and likely. Analysts at the Economist Intelligence Unit (EIU) project an additional 25-75 basis points of cuts by year-end, as the BSP seeks to counter a potential drag from slowing global trade.

Winners and Losers: Sectoral Implications

The easing cycle is a boon for select sectors. Financial institutions, particularly banks like BDO Unibank (BDO) and Metrobank (MBTIC), stand to gain from lower funding costs and increased loan demand. A weaker peso (despite the BSP's dismissal of its significance) could also boost export-oriented sectors, though domestic-focused financials remain the clear winners.

Real estate developers such as Ayala Land (ALI) and SM Prime Holdings (SMPHI) will benefit from reduced mortgage rates, which could ignite pent-up demand for housing and commercial properties. Meanwhile, consumer discretionary stocks like Challenger Motors (CHALMOT) (which manufactures pickup trucks) and Robinsons Retail (RRHI) may see sales growth as households enjoy higher disposable income from lower interest expenses.

Risks and the Road Ahead

No investment is without risk. A U.S. recession or a sudden spike in oil prices could reignite inflation, forcing the BSP to backtrack. Domestic risks include lingering supply chain bottlenecks and political uncertainty ahead of the 2028 elections. Investors should also monitor the peso's volatility, which could impact import-dependent firms.

Yet structural tailwinds remain robust. A P2.7 trillion infrastructure pipeline (2023–2028) promises to boost connectivity and productivity, while digital transformation—accelerated by the BSP's push for cashless payments—will underpin long-term growth.

Investment Strategy: Overweight Growth Sectors

Philippine equities now present a compelling entry point for growth-oriented investors.

• Overweight financials and real estate: These sectors are direct beneficiaries of lower rates and strong domestic demand.
• Underweight consumer staples: Sluggish global growth may dampen demand for imported goods, reducing pricing power for companies like Unilab (UNILAB).
• Consider PHP-denominated bonds and equity ETFs: The iShares MSCI Philippines ETF (EPHE) offers diversified exposure to the country's largest companies.

For contrarians, the peso's recent depreciation (despite the BSP's dismissal of its relevance) creates opportunities in dollar-cost-averaging strategies for foreign investors.

Conclusion

The BSP's June rate cut is not just a technical adjustment—it's a signal that Philippine monetary policy is now firmly growth-oriented. With inflation tamed and real rates high, further easing is all but inevitable. While global headwinds loom, the Philippines' demographic dividend, infrastructure boom, and digital evolution position it to outperform. Investors who embrace this transition stand to gain handsomely.

As the BSP's pivot takes hold, Philippine equities are primed to reward those who look beyond short-term noise and focus on the long-term story. The question is no longer whether to invest, but how—and in which sectors—to capture the upside.