Central Bank reduces rates in December

Cut brings rates to over three-year low: At its meeting on 11 December, the Central Bank (BSP) reduced the target reverse repurchase (RRP) rate by 25 basis points to 4.50%. BSP has now cut rates by 200 basis points since July 2024 and brought the RRP rate to an over three-year low.

Tame inflation and weakening GDP growth outlook motivate cut: December’s cut aimed to stimulate the economy: BSP stated that the outlook for domestic economic growth has deteriorated due to declining business sentiment over governance and global trade policy uncertainties. In recent months, the Filipino economy has been rocked by a corruption scandal linked to infrastructure spending, alongside a series of natural disasters. In a subsequent press briefing, Governor Eli Remolona commented that the rate cut would seek to compensate for weakening investor sentiment amid the ongoing graft probe. Meanwhile, the Bank noted that inflation remains benign and inflation expectations are anchored, providing space for the cut.

Bank signals easing cycle is almost over, but panelists remain dovish: In its press release, BSP stated that it “sees the monetary policy easing cycle nearing its end”, with additional rate cuts likely to be “limited” and based on incoming data. Virtually all our panelists expect further rate cuts in 2026, ranging from 25 to 125 basis points. A weaker-than-expected domestic economy poses a downside risk to the RRP rate, while higher-than-expected inflation is an upside risk.

Panelist insight: United Overseas Bank’s Julia Goh and Loke Siew Ting commented on the outlook: “Overall, the latest monetary policy statement and forward guidance indicate a clear shift from the accommodative tone in Oct to a more cautious, data-dependent stance in Dec. […]. In light of this and an anticipated dovish Fed under new leadership, we maintain our view of one final 25bps reduction in 2026, but it is now expected to be in 2Q26 rather than 1Q26. This will bring the RRP rate to our projected terminal level of 4.25% by mid-2026, where it is likely to remain for the rest of 2026.”

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