Manila: BMI, a unit of Fitch Solutions, is anticipating further interest rate cuts by the Bangko Sentral ng Pilipinas (BSP) before the year ends, driven by low inflation and slow economic growth. The financial analysis firm expects the BSP to reduce the policy rate by 25 basis points to 4.50 percent by the end of 2025, followed by an additional 50 basis points cut to 4 percent by the end of 2026.

According to Philippines News Agency, the BSP's Monetary Board, during its meeting on October 9, decreased policy rates by 25 basis points, attributing the decision to contained inflation within the target range and a weakened growth outlook. This adjustment brings the BSP's Target Reverse Repurchase (RRP) rate to 4.75 percent, with the overnight deposit and lending facilities now at 4.25 percent and 5.25 percent, respectively.

The BSP has already implemented a total reduction of 175 basis points in policy rates since last year. BMI highlighted that the central bank's recent decision to cut rates by 25 basis points was contrary to market expectations of maintaining the rates, as the domestic economic growth outlook has diminished.

The firm further emphasized that the central bank has significant leeway for easing due to diminishing inflationary pressures. The September headline inflation was reported at 1.7 percent, marking the seventh consecutive month below the BSP's target range of 2.0-4.0 percent. BMI estimates the average headline inflation to be 1.6 percent this year.

BMI also predicts that the BSP will persist with its easing cycle, reducing interest rates by a cumulative 50 basis points by the end of 2026. The analysis notes the likelihood of inflation rising in 2026 due to potential electricity rate hikes and the reimplementation of higher tariffs on rice imports. Despite this, the forecasted average inflation of 3.5 percent for 2026 remains within the BSP's target range. Moreover, GDP growth is projected to decelerate to 5.2 percent in 2026, falling short of the government's target of 6-7 percent. This scenario is expected to keep inflation contained, allowing the BSP to continue its monetary easing to stimulate economic activity.