BSP likely to continue easing until early 2026 – analysts

The Bangko ng Pilipinas (BSP) is expected to deliver two more 25-basis-point (bp) cuts until early next year following the central bank chief’s dovish comments, analysts said.

This came after the Monetary Board last week unexpectedly trimmed the key policy rate by 25 bps to a three-year low of 4.75%, a move that BSP Governor Eli M. Remolona, Jr. attributed to weakening business sentiment amid the widening flood control corruption mess.   

“We never bought into Mr. Remolona’s talk of a ‘sweet spot’ in August and, with corporate sentiment going from underwhelming to outright miserable, we reckon more monetary easing is in the pipeline until early next year,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said in a report.

“We still see a 25-bp cut in December and we’ve added an additional reduction in (the first quarter next year), taking the TRR (target reverse repurchase) rate to a terminal of 4.25%,” they added.

If realized, the policy rate of 4.25% would be the lowest in over three years or since August 2022 and would match the rate in September 2022.

Mr. Remolona had also signaled at least two more cuts at its December meeting and by next year, noting the BSP now sees the neutral nominal policy rate to be closer to 4% than their earlier projection of 5%. 

“BSP’s tone was decisively more dovish by suggesting that it sees scope for a more accommodative stance and that the output gap may be larger,” Nomura Global Markets Research analysts Euben Paracuelles and Yiru Chen said in a note.

Nomura likewise expects the BSP to bring borrowing costs to a terminal rate of 4.25% by the first quarter next year, but noted that they see “risks of more cuts next year if adverse scenarios play out.”

Meanwhile, Bank of the Philippine Islands (BPI) and MUFG Global Markets Research see the central bank’s policy easing potentially stretching until the first half of 2026.

“Further easing could be supported by several factors, including expectations that the (United States) Federal Reserve will also deliver additional rate cuts amid a more dovish composition of the FOMC (Federal Open Market Committee) once Chair (Jerome) Powell steps down in May 2026,” BPI Lead Economist Emilio S. Neri, Jr. said in a note.

Slower Philippine economic growth amid growing concerns over public infrastructure spending and disinflationary risks from China’s potential dumping could likewise give the BSP more room to cut, he added.

Last week, the Trade department warned China, which is facing high US tariff rates, might start diverting its goods to the Philippines. This move could lead to foregone revenues and slower inflation.

Mr. Neri expects the BSP to end its current easing cycle once the policy rate hits 4% next year.

“However, such aggressive easing could prove to be an overshoot, raising the risk of a sharp policy reversal later on once inflation accelerates,” he said.

“The possible continuation of BSP rate cuts could drive a rally in government bonds, led by the short end of the yield curve,” he added.

Meanwhile, MUFG Senior Currency Analyst Michael Wan said the central bank might also bring its reserve requirement ratio (RRR) to 4% from 5% by 2026. 

The BSP last reduced the RRR in February by 200 bps to 5%. RRR refers to the portion of a bank’s deposits held as reserves and cannot be lent out and is used to manage the banking system’s liquidity.

MUFG also noted that the Philippine central bank governor’s sentiments in the latest meeting reflect “somewhat less support” for the peso.

Mr. Remolona on Thursday said they will only defend the peso if it depreciates sharply to a point that it could become inflationary.

“For the PHP, these changes in forecasts imply somewhat less support for PHP from (a foreign exchange) perspective, but what will also matter for FX (foreign exchange) is the extent of growth slowdown, and also the resultant impact on key flow dynamics such as the current account deficit, FDI (foreign direct investment) inflows, and to a smaller extent portfolio flows,” MUFG’s Mr. Wan said. — Katherine K. Chan