The relative strength or weakness of the Philippine peso would be a consideration for monetary authorities in determining the extent and pace of the ongoing policy easing cycle, economists said.

Following the 25-basis point (bp) reduction in the policy rate to six percent on Wednesday, Oct. 16, Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri Jr. said in a report that "another rate cut from the Bangko Sentral ng Pilipinas (BSP) this year remains the base case given the favorable outlook for inflation."

The BSP lowered its headline inflation projection for 2024 to 3.1 percent from 3.3 percent previously.

The next policy stance meeting of the BSP's Monetary Board will be on Dec. 19, during which another 25-bp cut is widely expected and already signaled by Governor Eli M. Remolona Jr.

"However, there is a small probability of a pause especially if developments abroad continue to exert pressure on the peso," Neri said.

He noted that the peso has weakened to the 57.8:$1 level, from 55.8 against the greenback some weeks back, due to slightly rising global oil prices wrought by ongoing tensions in the Middle East plus the increasing likelihood of a pause in the US Federal Reserve's own monetary policy easing.

Philippine monetary policy is primarily geared towards the central bank's inflation targeting supportive of economic growth, unlike, for instance, neighboring Bank Indonesia's (BI) dual task that included defending their currency, the Indonesian rupiah. The BI kept its interest rates steady on Oct. 16, while the Bank of Thailand—like the BSP—cut rates by 25 bps on the same day, a decision that surprised markets.

Here at home, Neri said "the peso may strengthen towards the end of the year, as markets take into account the impact of the Federal Reserve rate cuts."

"However, despite potential gains from a Fed rate cut, the peso's appreciation might be more limited compared to other emerging market currencies as the Philippine economy continues to be in current-account deficit territory," he said, referring to the persistent net dollars deficit, which in end-2023 stood at 2.6 percent of gross domestic product (GDP).

For Neri, BSP policy rate cuts moving forward would unlikely be aggressive as both domestic and external risks emerge.

Due to foreseen higher electricity rates as well as minimum wages outside Metro Manila, the BSP hiked its 2025 inflation forecast to 3.3 percent from 2.9 previously, while the 2026 rate was projected at a faster 3.7 percent from 3.3 percent—although still within the targeted two- to four-percent band of moderate year-on-year price hikes.

Lower interest rates "may lead to a steepening of the yield curve, with a more pronounced impact on the short end compared to the long end of the curve," Neri added.

Rizal Commercial Banking Corp. (RCBC) chief economist Michael L. Ricafort agreed in his report that forthcoming interest rate cuts would be a function of the peso's behavior, on top of easing domestic inflation and further US Fed rate reductions.

Ricafort said future BSP rate cuts would "prioritize and optimize monetary easing and spur faster economic growth and development, as a policy priority, provided that the peso exchange rate is relatively stable vs. the US dollar."

In their report, United Overseas Bank (UOB) senior economist Julia Goh and economist Loke Siew Ting said the BSP's "baby steps" or gradual monetary policy easing would likely bring the reverse repurchase rate (RRP) to 4.75 percent by end-2025, taking into account their forecasted quarterly 25-bp cuts next year, which for Remolona may be "conceivable but somewhat on the dovish side," they noted.

"Outside of the Philippines, global central banks are expected to step up the pace of rate cuts this quarter and across 2025 amid an expected soft landing in the global economy and contained geopolitical risks," the UOB economists said.

For the part of ING, its Asia-Pacific research head Deepali Bhargava said the Dutch financial giant sees "scope for real rates to fall by another 150 bps by the end of 2026."

"The real policy rate at four percent-plus has hit a fresh high at a time when GDP growth is expected to remain below the government’s target of six to seven percent," Bhargava noted.

She said a "measured approach to future rate cuts" would be applied by the BSP as this year's inflation is expected to average 2.9 percent, with the Philippines seen benefiting from lower rice prices after India lifted its export ban on the Filipino food staple.