Rate cuts likely until 2026, but fiscal aid needed

The Bangko Sentral ng Pilipinas (BSP) is poised to deliver more policy rate cuts until 2026 as inflation is expected to remain within target, according to BMI, a unit of Fitch Solutions.

In its latest outlook, BMI projected that the central bank will hold rates steady at its October meeting but could slash by another 25 basis points (bps) in December, following Governor Eli Remolona’s recent signal of an additional adjustment before yearend.

“Amid signs of weakening economic growth, BSP Governor Eli Remolona signaled another 25bps cut to the policy rate before end-2025… But he also described the economy as being in a ‘sweet spot,’ which we interpret as a preference to stand pat at the next meeting in October,” the report said.

BMI sees inflation averaging just 1.6 percent this year – well within the government’s 2 to 4 percent target – before inching up to 2.5 percent in 2026. Despite potential pressures from rice tariffs, electricity adjustments, and peso weakness, the group said overall price growth should remain contained as growth momentum softens.

The research firm expects the BSP to cut another 50 bps in 2026, bringing the policy rate to 4.25 percent. It also forecasts economic growth to rise to 5.2 percent that year, supported partly by looser monetary settings.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., also projects another 25-bps BSP rate cut before the end of 2025, broadly matching the 50-bps worth of reductions expected from the US Federal Reserve. He noted that benign inflation would support the move but warned that it could be limited by the record-low 0.50 percentage point interest rate differential between BSP and Fed rates.

“Average inflation of about 1.7 percent in 2025, below the BSP’s 2–4 percent target, is possible due to still relatively lower rice prices, which account for around 9 percent of the CPI basket, and lower global oil and other commodity prices at their lowest in three to five years,” Ricafort said in an interview with DAILY TRIBUNE.

He added that policymakers face “a delicate balance between monetary easing and expansionary fiscal policy – but within acceptable budget deficit and debt leeway – to boost economic growth.”

Still, BMI warned that external risks – such as a worsening global tariff war – could sap consumer and investor sentiment, forcing the BSP to front-load rate cuts if inflation expectations remain anchored.

For SM Investments Corp. economist Robert Dan Roces, while easing is possible, the BSP will remain cautious.

“I think the BSP still has some room to cut rates this year, but it will tread carefully and be more data-dependent as global uncertainties, which include the Fed’s policy action timing to China’s slowdown, make premature easing risky,” Roces said.

He added that inflation staying below the 2–4 percent band may be optimistic given food supply strains, volatile oil prices, and a weaker peso.

“That said, I do think it will be within the target band, but with growth momentum softening, monetary easing alone can’t do the heavy lifting; fiscal policy – through spending on infrastructure, social protection, and supply-side support – needs to complement BSP’s moves so the recovery rests on broader and more durable foundations.”

While BSP’s policy space provides relief, analysts agree that the sustainability of the Philippines’ economic rebound will depend on a coordinated mix of monetary and fiscal actions.