A surprising calm has settled over the Philippine economy, as October’s inflation figures came in lower than anticipated. This unexpected deceleration is giving the Bangko Sentral ng Pilipinas (BSP) crucial breathing room, potentially paving the way for further measures to stimulate growth.
Analysts are now predicting a likely reduction in policy rates at the December meeting, a move of 25 basis points. The current inflation rate, holding steady at 1.7%, significantly undershoots the central bank’s target, creating a window of opportunity to inject momentum into the nation’s economic engine.
For eight consecutive months, consumer prices have remained below the BSP’s 2-4% target, a trend that has averaged out to 1.7% for the year so far. This consistent undershooting is a powerful signal, suggesting that the BSP can afford to be more proactive in supporting economic activity.
The possibility of a rate cut is further bolstered by concerns surrounding economic growth. A potential slowdown in the third-quarter Gross Domestic Product (GDP), due to be released soon, is adding to the urgency for the BSP to act. Weakness in government spending, linked to recent controversies, is believed to be a contributing factor.
The central bank has already taken significant steps, reducing benchmark borrowing costs by a total of 175 basis points since August. This has brought the policy rate to its lowest level in over three years, but some believe more can be done to bolster the economy.
Governor Eli Remolona, Jr. has indicated a willingness to continue the easing cycle into next year, acknowledging the need to cushion the economy against the fallout from recent events. This proactive approach signals a commitment to supporting growth even in the face of uncertainty.
Looking ahead, some analysts foresee the possibility of even more rate cuts in the first half of 2026, potentially two, if economic growth remains sluggish. The BSP may also consider aligning its policies with potential moves by the US Federal Reserve, particularly as leadership changes occur.
However, this strategy isn’t without risk. A premature easing of monetary policy could lead to overshooting, especially if inflation were to rebound later next year. Maintaining a delicate balance will be crucial for the BSP.
The peso has recently experienced volatility, touching a record low amid strong import demand. While seasonal remittances are expected to provide some support, the BSP’s dovish stance and equity outflows could continue to exert downward pressure on the currency.
Overall, the outlook suggests a continued accommodative monetary policy from the BSP. Economists predict inflation will remain below target for the foreseeable future, reinforcing the expectation of further rate reductions and a sustained effort to bolster economic growth.
Pantheon Macroeconomics anticipates a cut in December and another in the first quarter of next year, citing a likely continuation of below-target inflation. Their full-year inflation forecast for this year remains at 1.7%, with intensifying downside risks to their 2.4% projection for 2026.
