BSP seen to cut policy rate to 4% by 2026

The Bangko Sentral ng Pilipinas (BSP) will likely deliver three more rate cuts until 2026 to support the economy amid an anticipated slowdown, Fitch Solutions’ unit BMI said.

“(T)he BSP is poised to frontload easing to support the economy,” BMI said in an Oct. 10 note. “As such, we now expect BSP to cut by 25 basis points (bps) at its final meeting in 2025 in December to 4.5% and by another 50 bps in 2026.”

The Monetary Board on Thursday delivered a surprise 25-bp cut, bringing the target reserve repurchase rate to 4.75%, the lowest in over three years.

BSP Governor Eli M. Remolona, Jr. had said weakening business sentiment and investor confidence amid the ongoing flood control corruption scandal led to the Monetary Board’s decision.

BMI said it expects the Philippine economy to grow by 5.4% this year, before slowing to 5.2% in 2026, citing weak business sentiment due to the corruption mess and trade uncertainty.

This is below the government’s 5.5-6.5% gross domestic product (GDP) growth target for this year and the 6-7% goal for 2026.

“Our 5.2% growth forecast for 2026 is well below the government’s target of 6-7%. For one, the US-Philippines trade deal, which leaves 19% tariffs on Philippine goods in exchange for none on American ones, will weigh on the trade balance in 2026,” BMI said.

“For another, business confidence is likely to remain weak amid graft concerns and unpredictable US trade policy.”

BMI said its projection of 50-bp rate cuts in 2026 “may seem a meek response to what will be two consecutive years of growth underperforming the pre-pandemic trend.” This would bring the policy rate to 4% in 2026.

“However, we note that the BSP has already cut interest rates by a total of 175 bps since the current easing cycle began in (August) 2024,” it said. “We therefore expect the BSP to ease at a more measured pace while allowing more time for the easing thus far to feed through.”

Mr. Remolona had also given clear signals that the BSP’s policy easing could continue in December and until next year. 

“Risks to our forecast are skewed towards further rate cuts in 2026. Further unravelling of the corruption scandal across other infrastructure projects beyond flood control projects could dampen business sentiment and widen the output gap,” BMI said.

“With inflation expectations remaining well-anchored, the BSP could prioritize the economy and implement more policy rate cuts in 2026.”

BMI expects inflation to end at 1.6% this year, slightly below the central bank’s 1.7% forecast.

For 2026, BMI sees inflation picking up to 3.5%, faster than the 3.1% projected by the BSP.

Meanwhile, BMI said the central bank has ample reserves to defend the peso, which saw a weak performance after the surprise cut on Thursday.

“The BSP has sufficient reserves to defend the currency,” BMI said.

Gross international reserves jumped to an 11-month high of USD 108.805 billion at end-September, from USD 107.1 billion in August. It is also equivalent to 7.3 months’ worth of imports of goods and payments of services and primary income, well above the three-month standard.

“Besides, there probably will not be more selling pressure on the peso due to a 25-bp cut in December,” it added, referring to the Monetary Board’s Dec. 11 meeting.

Last week, Mr. Remolona said they will only defend the local currency if its depreciation becomes inflationary.

The Philippine peso on Monday closed at PHP 58.245 versus the US dollar, slipping by half a centavo from its PHP 58.24 finish on Friday, Bankers Association of the Philippines data showed. — K.K.Chan