BSP cuts rates as floodgate fallout lingers

The Bangko Sentral ng Pilipinas (BSP) has reduced its key policy rate by a further 25 basis points, citing manageable headline inflation, lower-than-expected investor confidence, and lethargic economic growth in 2025 due to the flood control scandal.

In a media briefing at the BSP main offices on Thursday afternoon, central bank Governor Eli M. Remolona Jr. said that the Monetary Board — the executive body of the BSP responsible for monetary policy decisions, which he chairs — resolved to cut the target reverse repurchase rate (RRP) by 25 basis points to 4.25 percent.

“The Monetary Board held its regular policy meeting today, guided, as always, by our primary mandate to keep inflation low, which supports balanced and sustainable growth. Today, we decided to cut the BSP's key interest rate by 25 basis points,” Remolona said.

“Our decision today may actually help to restore confidence, boosting investment and consumption. The pace of economic recovery will depend on how quickly confidence returns. As always, policy decisions will be driven by the data we have at the time we make those decisions,” he added.

Consequently, the interest rates on the BSP’s overnight deposit and lending facilities were adjusted to 3.75 percent and 4.75 percent, respectively.

The RRP is the BSP’s primary monetary policy tool, serving as the benchmark for overnight lending to banks. Adjustments to the rate influence borrowing costs, liquidity conditions, and inflation trends, and are guided by the BSP’s assessment of inflation dynamics, domestic demand, and global economic developments.

A lower RRP increases liquidity in the economy, with the objective of stimulating consumption and investment. However, this can generate inflationary pressures, which Remolona said remain contained for the time being.

“Inflation remains manageable. Our forecasts do indicate a slight uptick in inflation this year, but this is due largely to supply-side factors. While these factors are largely temporary, they will require continued vigilance with regard to possible spillover effects,” he said.

The Philippine Statistics Authority (PSA) reported that headline inflation landed at 2.0 percent in January, up from 1.8 percent in December and within the BSP’s forecast range for the month. The ample headroom provided by relatively stable inflation has allowed the central bank to reduce its RRP nine times since August 2024.

The Monetary Board previously cut the key policy rate in December 2025, which Remolona said occurred “at a time when painful governance issues around infrastructure investments have weakened government spending, business confidence and domestic demand.”

That same quarter saw gross domestic product (GDP) growth fall to 3.0 percent — the lowest since 2011 — bringing full-year 2025 growth to 4.4 percent, well below the national government’s target range of 5.5 to 6.5 percent. Economists and the BSP have largely attributed the slowdown to a loss of investor confidence following the outbreak of the “floodgate” scandal.

Remolona previously noted at a BSP event in Dumaguete City that the fourth-quarter and full-year GDP figures defied the central bank’s expectations, attributing the slowdown in part to a 41.9 percent year-on-year contraction in government infrastructure investment. On Thursday, he acknowledged that confidence, as measured by the BSP’s business and consumer confidence indices, played a larger role in last year’s downturn than previously believed.

“We didn't think the Q4 number would be so low, and that told us that actually confidence plays a bigger role than we thought. When the flood control scandal broke out, we recalibrated our models to take account of confidence. I think the recalibration wasn't enough to anticipate what would happen, but now we have some further work to do, and we now realize that it's a bigger factor,” he said.

Remolona added that the effects of any reduction in the RRP typically take one to two years to fully manifest, noting that the BSP’s monetary easing stance — while dependent on current and incoming data — remains “uncertain,” with a subsequent 2026 RRP cut resting heavily on future developments.

“It depends very much on whether confidence comes back as soon as we expect,” he said. “We're data-driven, but we're also gathering more types of data that we intend to use to understand what's going on.”