Poll: BSP to cut policy rate to 4.25%

By Katherine K. Chan, Reporter

SLUGGISH economic growth and a still benign inflation outlook provide the Bangko Sentral ng Pilipinas (BSP) with ample room to deliver a sixth straight interest rate cut at its first policy meeting this year, analysts said.

Based on a BusinessWorld poll conducted last week, all 16 analysts surveyed expect the Monetary Board to reduce the target reverse repurchase rate anew by 25 basis points (bps) on Thursday, Feb. 19.

If realized, the key policy rate would fall to 4.25% from the current 4.5%, the lowest in over three years or since the 3.75% in August 2022.

It would also match the benchmark rate set in September 2022.

Since the Monetary Board began its easing cycle in August 2024, it has so far lowered borrowing costs by a total of 200 bps.

The BSP started 2025 with a pause at its February meeting before delivering five consecutive 25-bp cuts, with the last two prompted by weak sentiment amid a growth slump.

Analysts said the disappointing fourth-quarter gross domestic product (GDP) print may outweigh other deciding factors in the central bank’s monetary policy review, as another round of easing is expected to help boost the economy.

“The Bangko Sentral ng Pilipinas will likely cut its policy rate by 25 basis points to 4.25% on Thursday to lend support to the economy, following a worse-than-expected fourth-quarter GDP outcome,” Moody’s Analytics Assistant Director and Economist Sarah Tan said in an e-mail.

In the final quarter of 2025, the Philippine economy grew by 3%, its worst performance in 16 years (excluding pandemic period), as the flood control corruption mess continued to slow down investments and spending.

This was even weaker than the revised 3.9% expansion seen in the third quarter, or when the flood control issue began to take a toll on the economy.

The graft scandal emerged following extensive flooding across the country that uncovered numerous faulty, substandard and even nonexistent flood control projects.

Investigations later revealed that Public Works officials, lawmakers and private contractors received kickbacks from the government’s infrastructure program.

This brought 2025 GDP growth to a post-pandemic low of 4.4%, falling below the government’s 5.5%-6.5% target for the year and the BSP’s 4.6% forecast.

“While the economic slowdown is largely the result of massive spending cuts by the National Government, the risk of a slow recovery in investor sentiment may compel the BSP to bring the policy settings below the estimated 4% to 5% neutral nominal rate more so that both headline inflation and the exchange rate are at levels the BSP are comfortable with,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a Viber message.

In a note, Chinabank Research said further easing could fast-track economic recovery, especially as the BSP’s recent surveys indicated a dim outlook among consumers and businesses for the year ahead.

“Another policy rate cut, which would further bring down lending rates, could provide additional incentive for consumers and firms to borrow in the near-term for big-ticket purchases and business expansion,” it said. “This could then strengthen the momentum of the country’s economic rebound.”

Based on the BSP’s latest Business Expectations Survey, businesses’ confidence index (CI) for the first quarter of the year fell to 23.7% from 49.5% in the previous quarter. For the next 12 months, it slipped to 40.4% from 48.1%.

Consumers were also less optimistic as their CI for the first quarter was at 3.6% from 6.9% in the previous quarter, while it went down to 11.8% from 14.1% for the coming year.

TAME INFLATION OUTLOOK
Meanwhile, analysts said the inflation outlook remains subdued even as the consumer price index (CPI) has accelerated since December, which could justify further easing.

“The inflation outlook also remains benign, allowing BSP to focus on supporting economic activity when prospects of reversing the sharp fiscal contraction and weak confidence still look uncertain at this point,” Euben Paracuelles, chief ASEAN economist at Nomura Global Markets Research, said in an e-mail.

In January, headline inflation picked up to 2% from 1.8% in December but eased from the 2.9% print last year. It marked the first time in about a year that the CPI is back within the central bank’s 2%-4% target.

“January CPI rose to 2% but remains at the lower end of the BSP’s 2-4% target range, keeping price expectations broadly anchored even as core inflation picked up, complicating — but not derailing — the case for further easing,” Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said in an e-mail.

BSP Deputy Governor Zeno Ronald R. Abenoja earlier said inflation will likely hover around the midpoint of the goal within the first half of the year.

He sees inflation exceeding 3% by the second half before cooling down and stabilizing below that mark.

By end-2026, headline inflation is expected to average 3.2% before slowing to 3% next year, according to the BSP.

Meanwhile, MUFG Global Markets Research noted that the widely expected quarter-point cut on Thursday risks diminishing the peso’s carry appeal.

“While rate cuts may help support growth, it also reduces the Philippine peso’s carry appeal, leaving the currency potentially vulnerable if the dollar strength re-emerges,” it said in a report.

The peso opened the year weaker, trading around the P58- to P59-a-dollar level in January and even hitting a record low of P59.46 on Jan. 15. However, the local unit has been gaining strength amid an underperforming US dollar in the past weeks.

“Expectations of further Fed easing this year — especially with the appointment of the relatively dovish Kevin Warsh as next Fed Chair — could help limit the peso’s weakness even with a narrower 50-bp differential,” Chinabank Research said.

At its first policy meeting for 2026, the Federal Reserve held its rates steady at the 3.5%-3.75% range. The Fed has so far lowered its benchmark interest rate by 175 bps since September 2024.

LOOMING PAUSE
Meanwhile, BPI’s Mr. Neri said the anticipated 25-bp reduction on Thursday is a close call as he sees the BSP considering a “strategic pause.”

Still, he sees room for a second cut this year either in April or June, before the Monetary Board stands pat throughout the remainder of the year.

“We expect the BSP to pause once it is clear that headline inflation is headed above the 3% level around (the third quarter),” Mr. Neri said. “We don’t see them cutting anymore after their June 18 meeting.”

Patrick M. Ella, an economist at Sun Life Investment Management and Trust Corp., said he sees potentially one more cut in the first half depending on the first-quarter GDP growth numbers.

“The (first-quarter) GDP report for 2026 that will be published in May will be a much anticipated report and should give an indication if further cuts are needed and how consumption has performed since (the fourth quarter), as well as government spending and investments from the private sector,” he said in an e-mail. “The worry is the deceleration in consumption if this will recover back to trend.”

For this year, the BSP forecasts Philippine GDP to expand by 5.4%, within the government’s 5%-6% target.

Meanwhile, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the BSP may cap its easing cycle after it trims the key policy rate to 4.25% this week as inflation will keep rising.

“For now, our view is that 4.25% will be the terminal rate, as monetary easing — in real terms — will continue regardless of further actual rate hikes, with inflation set to rise progressively throughout this year (rising inflation amid a stable benchmark rate means the latter falling in real terms),” he said in an e-mail.

After Feb. 19, the Monetary Board is set to hold five more rate-setting meetings this year on April 23, June 18, Aug. 27, Oct. 22 and Dec. 17.