Fed and BSP Preview: Back-to-back cuts post-US gov’t shutdown

We are now closing the year and both the US Federal Open Market Committee (FOMC) and the Bangko Sentral ng Pilipinas (BSP)’s Monetary Board are scheduled to convene their respective final meetings for the year next week.

Metrobank forecasts that the Fed will reduce the Federal Funds Rate (FFR) by 25 basis points (bps) post-US government shutdown to continuously support the labor market despite above-target inflation. Likewise, we expect the BSP to follow suit and reduce the reverse repurchase rate (RRP) by 25 bps.

Eye on Fed

Fed officials were divided at their last meeting, balancing their employment and price stability mandates. The upcoming meeting will likely be a repeat.

Although concerns on inflation remain, Metrobank thinks the FOMC will steer toward a policy rate cut to support the US economy, as the labor-market weakness remains.

US price spikes

Both the Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (PCE), and the Consumer Price Index (CPI) remain elevated.

Inflation remains elevated above the Fed’s 2.0% target. However, soft consumer demand and US firms absorbing some of the higher tariff costs are likely preventing large price spikes.

The lack of large upswings may provide some room to ease monetary conditions at a calculated pace to provide necessary support to boost the economy.

Signs of US jobs recovery

Delayed release of non-farm payrolls (NFPs), among others, confirmed our speculation of a still weak labor market during the US government shutdown.

Related article: The US economy after a historic government shutdown

Although September figures show a 119,000 month-on-month increase in NFPs, four months’ worth of worrisome NFP prints before September offset this. From May this year, the monthly NFP increase averaged 39,000, lower than the 2024 figures that prompted the Fed to begin its easing cycle.

An accommodative landscape is necessary to sustain the recovery seen in the recent jobs data.

BSP’s push for growth

In October, the BSP cut rates to pre-emptively address sluggish growth. It may be the same story in the upcoming meeting.

Gross domestic product in the third quarter grew by just 4.0% year-on-year. Although the slowdown was largely on the back of lower government spending, growth of household consumption expenditure also appeared to need a push.

Related article: How the Philippine economy can bounce back in 2026

BSP Governor Eli Remolona Jr. expressed that the central bank is in the process of determining how much of the deceleration can be attributed to lower demand.

Nonetheless, he said a December rate cut is possible though he maintained that the BSP will continue to take “baby steps.”

Still subdued inflation

Headline inflation was steady at 1.7% in October. This brings the year-to-date average to 1.7%, well below the BSP’s target range of 2%-4%.

Although we expect inflation to accelerate due to holiday-fueled demand, this likely won’t be enough to cause inflation to breach the lower bound of the BSP’s target range in 2025.

Metrobank calls

Despite still elevated inflation, Metrobank sees Fed officials favoring policies that stimulate the economy will prevail at the next meeting, delivering a 25-basis-point (bp) cut to bring the Fed Funds Rate (FFR) at 3.50-3.75%.

Meanwhile, Metrobank expects the BSP to deliver another 25-bp rate cut next week to stimulate consumption and investment. This will bring the Reverse Repurchase (RRP) rate to 4.50% and maintain the current interest rate differential (IRD) of 75 bps.

Maintaining the IRD may mitigate further pressure on the peso amid an already elevated USD/PHP spot rate which currently hovers around the higher end of the 58 level, and grazing the 59 level

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses)

MARIAN MONETTE FLORENDO is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She is a Certified Treasury Professional and holds an undergraduate degree in Mathematics from Ateneo de Naga University and an MA Economics in Economics from UP Diliman. She loves traveling and watching mystery movies in her spare time.

YOSHITAKA HIRAKAWA is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he constantly seeks new sights, sounds and experiences, from cliff jumping to trying new cuisines