Philippine economic growth continued to ease in the second quarter, slowing to 2.3% year-on-year as an improvement in government spending and net exports failed to offset slower household consumption growth and a contraction in investment.

The latest data print remains below the government's target of 3.5% to 4.5% growth. While subpar growth may warrant an accommodative monetary policy path, inflationary pressures stemming from the conflict in the Middle East may compel the Bangko Sentral ng Pilipinas (BSP) to prioritize price stability.

• Household consumption growth continued to decelerate along with gross capital formation, which fell deeper into negative territory. Meanwhile, the narrower trade deficit provided some support to growth.
• The slight easing of the services sector and the rebound in agricultural output both staved off the contraction in the industry sector as it continues to be weighed down by weak public construction.

• Metrobank Research maintains its forecasts for FY 2026 and 2027 GDP growth at 2.9% and 5.0%, respectively.
• Despite sluggish growth, Metrobank Research maintains its expectation that the BSP will deliver a cumulative 100 basis points worth of rate hikes to manage inflation pressure, bringing the target reverse repurchase (RRP) rate to 5.25%.
• For local fixed income, continue to favor the 2- to 5-year average duration of the curve, but remain biased toward the shorter end of the range, as elevated inflation expectations and further BSP policy tightening could keep upward pressure on yields and increase duration risk. The additional yield pickup beyond the 4- to 5-year area remains limited relative to the added interest rate volatility, making 2- to 5-year tenor bonds more attractive for managing risk.
• For equities, continue to favor defensive sectors such as power, water, and utilities, as demand for services remains strong even during periods of elevated inflation, supporting relatively stable earnings and cash flows. The financial sector may also benefit from higher lending rates and improved net interest margins, although earnings growth could be tempered by relatively weaker loan demand.
• For USD/PHP, remain a buyer of US dollars on dips on the back of Q3 seasonal demand, weak PH fundamentals and markets, and relatively high US yields. 

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