BSP cuts rate to 4.5 percent as growth risks linger

The central bank signals measured easing as analysts weigh growth, fiscal, and currency risks.

The Bangko Sentral ng Pilipinas (BSP) cut its policy rate to 4.5 percent Thursday, continuing its move to support a slowing economy, though analysts say further easing may be limited.

UK-based think tank Pantheon Macroeconomics expects the BSP to allow one more 25-basis point reduction in early 2026, bringing the benchmark rate to a projected terminal level of 4.25 percent. 

“The peso’s wobble in recent weeks to the psychological level of P59 to the dollar, coupled with the Fed’s ‘hawkish’ cut yesterday, probably was more than enough to dissuade members from taking more aggressive monetary action,” said Miguel Chanco, chief emerging Asia economist at Pantheon.

Chanco noted that Pantheon had initially anticipated a 50-basis point cut, citing the “abysmal” third-quarter GDP performance and inflation still hovering below the BSP’s 2-to-4 percent target range. He added that the BSP’s statement, which noted that the “easing cycle [is] nearing its end” and that “any additional easing will likely be limited and will be guided by incoming data,” signals a clear preference for smaller, measured reductions.

Rate cut carries a ‘dovish tone’

Dutch bank ING also described the rate cut as carrying a “dovish tone” but highlighted ongoing risks to growth. Deepali Bhargava, ING’s regional head of research for Asia Pacific, said recent GDP data points to weak government spending as a persistent drag on the economy, likely weighing on both public investment and private sector confidence through the current quarter.

“While household consumption may rebound in the fourth quarter, investment and public spending are likely to stay muted, keeping overall growth subdued,” Bhargava said. She added that the recent floods in parts of the country could further affect agriculture and infrastructure, complicating the outlook for economic activity.

Pantheon and ING agree that growth remains fragile. Pantheon’s Chanco said the BSP is likely to continue easing until the benchmark rate reaches its terminal level, reflecting the central bank’s balancing act between supporting the economy and maintaining currency stability. Meanwhile, ING forecasts fourth-quarter GDP growth to remain soft at around 4 percent, similar to the third quarter, with 2026 growth projected at 5.4 percent but risks tilted to the downside.

Fiscal policy as a critical factor

Both institutions highlight fiscal policy as a critical factor. Bhargava pointed out that although the finance minister has indicated a return to normal government spending in the first quarter of 2026, meaningful recovery in investment and consumption is expected only in the second half of the year. “The drag from fiscal weakness has been significant, and even when spending improves, consumer confidence will take time to recover,” she said.

The rate cut also reflects BSP’s careful approach to inflation and currency pressures. With the peso under pressure and global monetary conditions tightening, the central bank appears to be taking a cautious stance, avoiding aggressive moves that could destabilize the currency while still signaling support for growth.

For businesses and consumers, lower interest rates may provide temporary relief on loans and financing costs, potentially supporting consumption and investment. However, with economic growth subdued and fiscal spending only gradually returning to normal, companies may continue to face a challenging operating environment, while households may not see an immediate pickup in spending power.

The BSP’s next moves will be closely watched by analysts and markets. Pantheon expects the final 25-basis point reduction to come at the first monetary policy meeting in 2026, while ING emphasizes that external pressures and domestic fiscal weakness could shape the central bank’s decisions beyond the rate cut.

Overall, the policy action underscores a delicate balancing act for the BSP: supporting a slowing economy while navigating inflation, currency pressures, and fiscal constraints. For Philippine businesses and consumers, it signals continued caution—benefits from lower borrowing costs may be gradual, while broader economic challenges are likely to persist into the new year.

 

 

The Bangko Sentral ng Pilipinas cut its policy rate to 4.5 percent, signaling continued support for the slowing economy. Analysts say further easing may be limited, with fiscal weakness, subdued growth, and currency pressures shaping the outlook for businesses and consumers.

 

 

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