BSP cuts key rate amid growth slump

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) lowered its key policy rate by 25 basis points (bps) for a sixth straight meeting, a move seen to help the economy regain its momentum following a slowdown last year.

On Thursday, the Monetary Board lowered the target reverse repurchase rate (RRP) by 25 bps to 4.25%, the lowest in over three years or since the 3.75% in August 2022. This matched the benchmark rate set in September 2022.

Rates on the overnight deposit and lending facilities were also trimmed by 25 bps each to 3.75% and 4.75%, respectively.

The Monetary Board’s latest move met market expectations, as all 16 analysts polled by BusinessWorld anticipated a 25-bp cut.

This brought the BSP’s total reductions to 225 bps since it began its series of monetary policy easing in August 2024.

The sixth straight rate cut came after weaker-than-expected economic growth, triggered by the flood control corruption scandal that broke out last year.

“Growth has been softer than expected. Investments slowed,” BSP Governor Eli M. Remolona, Jr. said during a briefing. “We attributed this to a lack of accuracy. But soft data on sentiment showed tentative signs of recovery.”

“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,” he added.

In the fourth quarter of 2025, the Philippine economy grew by 3%, its worst performance in 16 years (excluding the pandemic period). This brought the full-year gross domestic product (GDP) growth to a post-pandemic low of 4.4%.

The BSP had expected growth to settle at 3.8% in the final quarter of last year to bring the full-year print to 4.6%.

In 2025, the BSP delivered a 25-bp cut at each of its meetings in April, June, August, October, and December, with the last two prompted by a clouded growth outlook as governance issues weakened consumer and business sentiment.

“Economic growth has undershot the BSP’s expectations due to weaker domestic demand. Latest indicators point to a recovery in the second half of the year, but growth will depend largely on how quickly confidence recovers,” Mr. Remolona said.

However, the central bank slashed its GDP growth forecast for this year to 4.6% from 5.4% previously. If realized, this would undershoot the government’s 5%-6% target.

It likewise sees the economy expanding by 5.9% in 2027, lower than its earlier projection of 6.3%.

‘MANAGEABLE INFLATION’
A still benign inflation outlook also provided the central bank with additional room to ease, even as it raised its projections amid emerging supply-side pressures.

“The outlook for inflation remains manageable,” Mr. Remolona said. “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.”

Headline inflation returned to the BSP’s 2%-4% target band after nearly a year as it accelerated to 2% in January.

The latest consumer price index was faster than the 1.8% recorded in December but softer than the 2.9% clip a year ago.

BSP Deputy Governor Zeno Ronald R. Abenoja said they now expect inflation to average 3.6% this year, higher than their 3.2% estimate in December.

For 2027, the central bank projects inflation to ease slightly to 3.2%, still above their previous forecast of 3%.

Electricity rate adjustments, costlier oil and the impact of the government’s flexible rice tariff scheme on local rice prices will likely add inflationary pressures this year, Mr. Abenoja said.

However, he noted that price pressures from such supply-side factors “may not be persistent and could fade away after some period of time.”

UNCERTAIN POLICY PATH
Asked how the policy path ahead looks now, Mr. Remolona said: “It’s less certain.”

He noted that consumer and business confidence is now a main concern, adding that the outlook for monetary policy easing would depend on how soon sentiment will recover.

“We see confidence will return very soon, in a few months. If we’re right, then we won’t need further cuts,” Mr. Remolona said.

Earlier this month, the BSP chief said they were seeing signs of recovering confidence, citing improving activity in manufacturing and the stock market, as well as easing yields in government securities.

Mr. Remolona said the impact of weak confidence on the country’s growth prompted the central bank to “give a bigger weight” to confidence.

“We’re now in a situation where it’s more conditional on what happens to confidence in growth,” Mr. Remolona said. “Because in December, we were more confident that confidence would return pretty soon. And the lack of confidence actually turned out to be bigger than we thought,” he added.

However, the BSP governor also said that they will stick to their price stability mandate, which means that keeping inflation low will remain a priority in monetary policy decisions.

“We support growth, and we do want growth. But at the same time, our main mandate is still inflation,” Mr. Remolona said. “So, to the extent we can support growth without causing inflation, we will support growth.”

Meanwhile, Metropolitan Bank & Trust Co. Chief Economist Nicholas Antonio T. Mapa said the central bank’s inflation outlook will likely drive its policy path going forward.

“Market was split on the decision, but BSP opted to deploy support sooner rather than later. Any potential future easing remains contingent on the inflation outlook,” he said in a Viber message.

“Monetary authorities also appeared to have an ardent focus on confidence building, hinting that the easing cycle could be extended for just a little longer,” he added.

Capital Economics Deputy Chief Emerging Markets Economist Jason Tuvey sees scope for “at least” one more 25-bp reduction in the following months if the economy stays weak and inflation remains manageable.

“It’s also worth noting that the BSP removed the line from its previous statement that ‘the monetary policy easing cycle (is) nearing its end,’ suggesting that it remains open to the idea of further loosening,” he said in a commentary on Thursday.

“All told, if the economy remains sluggish and inflation contained, as we expect, there is likely to be scope for at least one more 25-bp cut to interest rates, to 4%, over the coming months,” he added.

In a separate commentary, ANZ Research said recovering lost confidence may take time, but improved government spending will likely accelerate the process.

“Our assessment is that confidence will take time to return and will need to be supported by a revival in government spending,” ANZ Research foreign exchange analyst Kausani Basak and Chief Economist for Southeast Asia and India Sanjay Mathur said. “Still, we will monitor developments in consumer and corporate confidence before reconsidering our current view that the BSP has completed its rate-cutting cycle.”

The Monetary Board is scheduled to have its second policy review this year on April 23.