Soft inflation, weak economy leave room for further easing

THE BANGKO SENTRAL ng Pilipinas (BSP) still has space for further easing this year as inflation remains subdued and as weak investor sentiment due to a wide-ranging graft scandal could persist, leading to a prolonged economic fallout.

Metropolitan Bank & Trust Co. (Metrobank) said in a commentary on Wednesday that the BSP could deliver up to 50 basis points (bps) more in cuts to cap its current easing cycle, which would bring the policy rate to 4%.

“With inflation having settled below the Bangko Sentral ng Pilipinas’ 2.0%-4.0% target range last year, inflation in 2026 is expected to move back within target, largely driven by base effects,” it said.

“Within-target inflation, together with still-soft economic activity and subdued consumer and investor sentiment should provide leeway for the BSP to reduce the policy rate further to its terminal rate.”

Headline inflation averaged 1.7% last year, slightly above the central bank’s 1.6% full-year forecast but below its 2%-4% target.

The Monetary Board has lowered benchmark borrowing costs by a total of 200 bps since its rate-cut cycle began in August 2024.

In 2025 alone, it delivered a cumulative 125 bps in reductions for five straight meetings to bring the policy rate to an over three-year low of 4.5%.

BSP Governor Eli M. Remolona, Jr. said on Tuesday that they could consider a sixth straight cut at the Monetary Board’s Feb. 19 review, but noted that the current policy rate is already “very close” to where they want it to be, signaling an imminent end to their easing cycle.

He said only weaker-than-expected growth would prompt two reductions this year.

In the third quarter of 2025, Philippine gross domestic product (GDP) growth slumped to an over four-year low of 4% as allegations that Public Works officials, lawmakers and private contractors received kickbacks from anoma-lous flood control projects led to slower public spending and hit investor confidence.

Metrobank said government spending and household consumption may remain “subpar” this year, but the BSP’s accommodative stance could help support domestic demand, which would support a gradual economic recovery.

“As the BSP moves policy rates to neutral in 2026 and the investment environment improves, investment activity is expected to pick up. Private consumption should also improve with anticipated increases in direct cash transfers from the government in lieu of the budget initially allocated for public construction. However, gains will likely be capped by still elevated consumer debt levels and weak sentiment stemming from ongoing govern-ment controversies,” it said.

“Overall, these should allow GDP growth to strengthen this year… As the lagged impact of BSP’s monetary easing cycle takes full effect, we expect a pickup in household consumption.”

Meanwhile, other analysts only see one more rate cut from the BSP this year.

ANZ Research Chief Economist for Southeast Asia and India Sanjay Mathur said the BSP could deliver a 25-bp cut next month and then hold fire until next year.

United Overseas Bank Ltd. (UOB) Group Research Senior Economist Julia Goh and economist Loke Siew Ting see the central bank pausing at its February meeting and then delivering a final 25-bp cut at its April 23 or June 18 re-view.

“The latest inflation outturn supports an interim pause in BSP’s easing cycle when the Monetary Board meets for the first time this year on Feb. 19,” they said in a commentary. “This is further echoed by BSP governor’s latest re-marks and prior guidance that further cuts will be limited and data-dependent.”

FASTER INFLATION
Meanwhile, Metrobank sees inflation picking up to 3.3% this year due to a low base and increased demand-side pressure.

“This could be exacerbated by higher import costs associated with higher tariffs and weaker peso moving forward,” it said. It expects the consumer price index to average at a slower 3% in 2027.

A stronger dollar, weak investor sentiment, and a wide current account deficit could affect the local currency, it added.

“Although resilient exports amid US tariffs will help narrow the current account deficit, it is expected to remain wide. Coupled with an anticipated recovery in dollar strength, driven by stronger growth in the US, these assumptions will continue to weigh on the peso and offset gains from the anticipated wider IRD (interest rate differential) between the Fed and the BSP.”

Meanwhile, UOB raised its inflation projection for 2026 to 3% from 2.5% previously as electricity rate adjustments, higher rice tariffs, and bad weather conditions could add to price pressures.

Moody’s Analytics economist Sarah Tan likewise expects faster inflation this year as the lingering impact of typhoons that hit the country late last year may continue to weigh on food prices.

“Weaker agricultural output weighed on food production, underscoring the growing strain on supply chains and rural livelihoods. As damage to farmland and logistics infrastructure continues to disrupt distribution, these pressures are likely to persist in the near term, adding to upside risks for food prices,” she said in a commentary. — Katherine K. Chan