Central Bank reduces rates in February

Cut brings rates to over three-year low: At its meeting on 19 February, Bangko Sentral Pilipinas (BSP) reduced the target reverse repurchase (RRP) rate by 25 basis points to 4.25%. The decision aligned with market expectations. The BSP has now cut rates by 225 basis points from their recent peak in July 2024, bringing the RRP rate to its lowest level in over three years.

Sluggish domestic demand and manageable inflation motivate cut: The cut was driven by recently weaker-than-expected economic growth, capped by softer domestic demand. BSP added that the latest indicators point to a recovery in the second half of the year, but the pace will depend largely on how quickly consumer and business confidence rebounds. Regarding price stability, the Bank noted that while inflation forecasts have edged up slightly for 2026 due to supply-side pressures, these disruptions are seen as temporary. Moreover, inflation expectations remain firmly anchored, and inflation is forecast to return to the 3.0% target in 2027, thus providing room to ease.

Bank keeps door open but signals data-dependent approach: BSP stopped short of signaling an end to the easing cycle, instead emphasizing that future decisions will be guided by incoming data, particularly on inflation. A slim majority sees 25–75 basis points of further cuts by December, while others panelists expect the Bank to remain on hold in the remainder of 2026. A weaker-than-expected domestic economy poses a downside risk to the RRP rate, while higher-than-expected inflation as a result of recent oil-supply shocks is an upside risk.

Panelist insight: ING’s Deepali Bhargava commented: “Real rates remain elevated […]. This keeps monetary conditions tighter than what current economic momentum seems able to absorb. […] The latest 4Q data shows that soft government spending has become a more persistent drag, weighing not only on fiscal outlays but also on business and household confidence. We expect this pressure to persist at least through the first half of 2026, given ongoing investigations and unresolved political uncertainty that continue to dampen sentiment. Against this backdrop of softer demand, elevated real rates, and lingering confidence issues, the door remains open for additional monetary easing. The risk of further monetary policy easing is likely to keep the peso weaker vs the US dollar.”

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