February Market Update: BSP’s RRP Rate Cut and US Tariff Drama Continues

Authored by: Kendrick Ong, Trisha Chen, and Xian Tumang

Edited by: Elijah Soriano, Ethan So, Justin Choi, and Jared Go

Latest Economic Data

• Philippine Economic Data

  • 200 bps cut to RRR from 7% in January to 5%

  • YoY Inflation Rate at 2.1%

  • BSP holds RRP constant at 5.75%

• US Economic Data

  • CPI and Core CPI at 0.2%

Introduction

The last few months have seen unprecedented levels of economic shakeup. Following the month of January, Donald Trump has continued US foreign policy of protectionism, engaging in tariff battles with Canada, China, Mexico, and the EU. Additionally, Trump has levied tariffs on specific industries, targeting steel and aluminum sectors around the world (Minsberg, 2025). Though the Philippines has not been labeled as a tariff target for the mean time, uncertainty is prevalent in the financial markets as the nation navigates through precarious international economic conditions.

BSP Cuts RRR and Holds RRP Rates

The Bangko Sentral ng Pilipinas’ Governor Eli Remolona hinted during the BSP’s February 13, 2025 Monetary Policy Stance Press Briefing that a significant cut to the Reserve Requirement Ratio (RRR) could come into effect soon. Indeed, on February 21st, the BSP announced that it will bring down the RRR for commercial banks (UKBs) and non-bank financial institutions with quasi-banking (NBQBs) functions from 7% to 5%; digital banks from 4% to 2.5%, and thrift banks from 1% to 0% starting by March 28, 2025. (Gonzales, 2025)

When questioned about the decision to prioritize the lowering of the RRR over a Reverse Repurchase (RRP) rate cut, Governor Remolona stated that an RRR cut would reduce financial distortion, indicating a structural, permanent shift in BSP policy. Furthermore, reducing the RRR opens up additional capital for financial institutions to lend out, stimulating the Philippine economy by allowing more money to flow through its system. Though this decision induces some risk in the event of a financial crisis, this could provide greater opportunities for faster Philippine economic growth. (Gonzales, 2025).

Beyond the RRR cut, Governor Remolona announced that the BSP would keep Reverse Repurchase rates (RRP steady) at 5.75%. The reverse repurchase rate (RRP) is a monetary policy tool where the BSP buys back securities from banks to absorb liquidity from the banking system. This move to hold rates indicates that the BSP does not intend to expand the nation’s money supply yet. Despite the previous year’s expectations of further 2025 rate cuts, Governor Remolona cited turbulence and uncertainty in global economic markets and the potential impacts they could have on domestic markets as justification for holding rates steady.

Moving to the domestic front, despite global uncertainty, both Governor Remolona and Deputy Governor Dakila stated that Philippine inflation risks have become broadly balanced for 2025 and 2026, at 3.5% and 3.7%, respectively. Though the 2025 inflation forecast slightly shifted to the upside from 3.4% to 3.5%, the BSP maintains that these figures are still within their expectations, and not materially different from previous forecasts. Deputy Governor Dakila cites upside pressures through utilities and an expected lag impact from the aggregate 8.1% increase of minimum wage during 2024, which is counterbalanced by the moderation of rice inflation driven by lower import tariffs on rice. In addition, the Governor showed optimism for the Philippine economy to grow by at least 6%, citing that the nation is within capacity to do so with manageable inflation. Overall, the BSP still expects inflation to settle to the target range in 2026.

US Tariff Drama Continues

Inflation rekindled and business uncertainty rose in the United States. (Boak et al., 2025). In January, the US initially announced tariffs on some imported products coming from their three largest trading partners: Canada, Mexico, and China. Following that, the three nations announced retaliation against US products. While a 25% tariffs on Canadian and Mexican products were put on hold until March 4, a 10% tariff on Chinese products have been in effect since February 4. In addition, a 25% tariff on European Union products was also announced on February 26.

While the effects of tariffs are unclear, tariffs of this scale can have significant effects on the economy both domestically and on the affected trading nations. As tariffs place an import tax on selected products, consumers in the US will pay a higher price on imported goods. Some highly imported goods in the US include: automobiles, electronics, pharmaceuticals, and industrial equipment (Hansen, 2024). This ultimately can lead to a weakened consumer purchasing power as consumers would consume fewer imported goods. At the same time, businesses that use imported goods as raw materials will experience higher input costs and would need to pass along the costs to consumers. The US heavily exports products such as petroleum, soybeans, automobiles, and electronics (York, 2025). The price increase could make US exporters less competitive in the global market.

On the other hand, foreign trading partners like Canada and Mexico can be likewise affected by tariffs imposed by the US and retaliatory tariffs imposed by their home countries. In a scenario where tariffs are levied on US goods, foreign consumers could find themselves looking for substitutes as prices on US goods increase. From agricultural products, to minerals, to chemicals, and machinery, foreign trading partners could seek to find cheaper alternatives from other trading partners around the world. Hence, businesses that export to the US could also experience a decline in revenues, inducing the need to cut down on costs. At worst, this could result in a rise in layoffs and unemployment across affected sectors.

This is not the first time Trump and the US have gone to a trade war. The 2018 US-China trade war was estimated to cost the US a reduction in long-run GDP by 0.2% and an employment loss of 142,000 jobs (York, 2025). However, only this time, Trump announces tariffs on multiple major trading partners such as Canada, Mexico, China, and the European Union, and across major sectors and industries such as minerals, steel, semiconductors, and agricultural products. As its downstream effects remain highly ambiguous, this potential trade war can severely impact the global economy, making countries and markets much more wary of its uncertainty.

Conclusion

Although February was a relatively quiet month in both the global and domestic markets, the economic landscape is constantly experiencing shifts, especially with regard to global trade. Domestically, the BSP cuts the RRR by 200 basis points as it looks to increase liquidity in financial institutions, while holding the RRP as they stand by to see the uncertainty in the global markets unfold. With that said, Trump’s administration in the US announced and implemented a slew of tariffs on its major trading partners and industries, causing retaliatory tariffs to be levied back upon them. The effects of this potential trade war remain unclear, but the financial markets are highly vigilant of how this event may transpire in the coming months.

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References

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