Philippines’ central bank delivers expected rate cut paired with uncertain guidance

The Bangko Sentral Pilipinas delivered an expected 25bp rate cut but offered cautious and uncertain forward guidance as the recovery in growth remains softer than anticipated. Elevated real rates and subdued confidence keep the risks tilted towards further easing.

Expected BSP rate cut comes with cautious, uncertain forward guidance

The BSP lowered its target rate by 25bp to 4.25%, in line with both our expectations and the broader consensus. The tone of the decision was noticeably more uncertain, reflecting a softer‑than‑expected growth recovery. This shift led the BSP to remove language suggesting it was “nearing the end of easing,” resulting in a more neutral stance. The BSP also expressed reasonable concern around soft consumer and business sentiment, resulting from weak government spending.

BSP stays data‑dependent, but confidence takes centre stage

Looking ahead, further easing will depend heavily on how quickly confidence returns. Confidence is increasingly becoming a core driver of the BSP’s policy reaction function. While the BSP’s latest inflation forecasts were nudged slightly higher – to 3.6% in 2026 and 3.2% in 2027 (from 3.2% and 3% previously) – inflation is still expected to remain largely contained. The upward revision mainly reflects one‑off supply‑side factors such as adjustments in electricity rates, the flexible rice pricing mechanism, and base effects, all of which should have only a transitory impact on inflation.

Muted growth outlook leaves door open for more policy easing

Real rates remain elevated at around 2.25% even after today’s rate cut, with the latest inflation print at roughly 2%. This keeps monetary conditions tighter than what current economic momentum seems able to absorb.

We recently trimmed our 2026 GDP growth forecast further to 5.2% with risks skewed to the downside. The latest 4Q data shows that soft government spending has become a more persistent drag, weighing not only on fiscal outlays but also on business and household confidence. We expect this pressure to persist at least through the first half of 2026, given ongoing investigations and unresolved political uncertainty that continue to dampen sentiment.

Against this backdrop of softer demand, elevated real rates, and lingering confidence issues, the door remains open for additional monetary easing. The risk of further monetary policy easing is likely to keep the peso weaker vs the US dollar.

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