Sluggish growth, subdued inflation to prompt further rate cuts


The Philippine central bank’s third consecutive interest rate cut this year has prompted private sector economists to anticipate continued easing, citing sluggish economic growth and subdued inflation.

On Dec. 19, the Monetary Board (MB) reduced the key borrowing cost by 25 basis points (bps), bringing the key policy rate to 5.75 percent.

Jonathan Ravelas, senior advisor at Reyes Tacandong & Co. and managing director of e-Management for Business and Marketing Services, said this move aligned with market expectations—except his.

“I was expecting a 50bp [cut], as it might be difficult to cut rates later, especially after the Fed’s [U.S. Federal Reserve] recent pronouncements that future cuts would require fresh progress on inflation,” Ravelas said.

He explained that “this caused the dollar to strengthen further overnight, which also led to a decline in equity prices.”

Sunny Liu, lead economist at Oxford Economics, expects the central bank to continue cutting rates in its first-quarter meeting, with a total reduction of 75 basis points projected for next year.

However, Liu noted that the latest decision of the Bangko Sentral ng Pilipinas (BSP) “has increased depreciation pressures on the currency. The peso has been weakening against the US dollar since October when financial markets started anticipating a Trump election win.”

“Following a brief period of gains, it has reverted to a weakening trend since the second week of December. Although the policy rate is not seen as a tool to influence the exchange rate, the pass-through effect of a weaker peso on inflation is a concern for the BSP,” Liu added.

With the US Federal Reserve expected to slow the pace of rate cuts next year, Liu said there is a risk that the central bank might also ease rates more cautiously.

Less aggressive cuts

Contrary to the previous expectation that the BSP would cut rates by a total of 100 bps in 2025, economists have revised this figure. Oxford Economics now anticipates 75 bps, which could still be tempered by the Fed’s slower pace of easing.

The Ayala-led Bank of the Philippine Islands (BPI) has an even lower forecast, seeing “a mere 50 basis points as a base case” for next year, citing global inflation risks and potential U.S. policy shifts—factors that could limit aggressive easing.

“We continue to subscribe to the view that the BSP will avoid cutting rates aggressively in2025 as global price risks could thwart outsized monetary easing actions,” said Emilio S. Neri, Jr., senior vice president and lead economist at BPI.

“While the first half of the year may present opportunities, cutting rates in the latter half could be more challenging, as the Federal Reserve’s outlook could shift in response to the potentially inflationary policies of the incoming US administration,” Neri explained.

He added that if tariffs swell and mass deportations occur, U.S. inflation could surge, leading global central banks—including the BSP—to shift towards tightening monetary policy.

Julia Goh, senior economist at Singapore-based United Overseas Bank (UOB), agrees with Neri on the favorable developments during the first half of 2025, as she expects the succeeding cuts to end by this period.

“We bring forward our expectation of an end to BSP’s easing cycle to mid-2025,” changing from its previous projection that the central bank will end the cycle to 4.50 percent by the first quarter of 2026.

Specifically, Goh expects the BSP to make three more 25 bps cuts, bringing the final rate to 5.00 percent by mid-2025. This forecast aligns with BSP Governor Eli M. Remolona Jr.’s statement that 100 bps for the 2025 cut may be “a bit too much,” given the latest developments.

However, Gareth Leather, senior emerging markets economist at Capital Economics, expects a further 100 bps of cuts in 2025. He asserted that economists now agree with the think tank’s forecast that interest rates will finish 2025 at 4.75 percent.

Meanwhile, Harry Chambers, assistant economist at Capital Economics cited the recent sharp drop in inflation which has allowed the BSP to continue easing. He noted that although further rate cuts are expected, the central bank’s governor cautioned that cuts will be gradual due to inflation risks. 

Trump-linked risks

According to Goh, global developments after the U.S. President-elect Donald Trump’s inauguration is seen as a major factor influencing next year’s interest rate decisions. 

The BSP earlier said that it would closely monitor U.S. events and their effects on global growth and markets before adjusting its monetary policy.

Capital Economics said that protectionist trade policies under Trump, including a 60 percent tariff on Chinese imports and a 10 percent universal tariff, could heavily impact China in 2025.

“Parts of Asia are vulnerable too given their large trade ties with the US,” Leather warned.

However, he noted that “a blanket tariff would leave EMs [emerging markets] outside China [e.g. Philippines] on a level playing field so exports may not drop much, particularly because currencies are likely to weaken.” 

As long as high tariffs target China, Southeast Asia could continue to benefit from the trend of friendshoring, the economist added.

Capital Economic reported that Vietnam has been the top beneficiary of worsening US-China relations. Leather said other low-wage economies in the region, including the Philippines, could also benefit from this by improving their business environments.

Meanwhile, Trump’s economic policies are expected to push Treasury yields higher and strengthen the dollar, posing challenges for emerging markets. However, the good news is that “most EMs have low external vulnerabilities, reducing the risk of currency crises.”