Japanese banking giant MUFG Bank Ltd. expects the Bangko Sentral ng Pilipinas (BSP) to lower interest rates at a slower pace next year alongside an also slower depreciation of the Philippine peso when US President-elect Donald J. Trump returns to the White House.

In a Dec. 20 report, MUFG senior currency analyst Michael Wan noted that while the BSP's 25-basis point (bp) cut last Dec. 19 was widely expected, "the communication for 2025 was less dovish, with Governor [Eli M.] Remolona [Jr.] highlighting that the 100-bps cuts the BSP was previously communicating for 2025 was probably too much, but also said that no cuts are too little."

As such, Wan forecasted the BSP to reduce the policy rate by a total of 75 bps next year, to end 2025 at five percent from the current 5.75 percent, "with continued moderation in domestic rice prices and contained inflationary pressures helping."

In particular, MUFG sees the BSP cutting key rates by 25 bps each in the first three quarters of next year, before pausing in the fourth quarter of 2025.

In an earlier Asian foreign exchange (FX) outlook report, MUFG said that while the peso could "trade closer to 60:$1 levels" in the near term, the domestic currency is expected to recover for the rest of next year.

Specifically, MUFG forecasted the peso to hit 59.7 against the greenback in the first quarter of 2025 "as the dollar strengthens and as Trump swiftly pushes through his tariffs at the start of his term"; 59.3 during the second quarter; 59 by the third quarter; and further strengthen to 58.8 versus the US dollar in the fourth quarter.

"Philippine peso should see some relief in the second half of 2025 as dollar strength reverses and also as growth vs. inflation mix improves in the Philippines in 2025. We see the lagged impact of lower inflation, rate cuts, boost from midterm election spending and surge in FDI [foreign direct investment] approvals helping the peso," MUFG said last Dec. 9.

"We think the Philippine peso can outperform the likes of the Chinese yuan, Thai baht, Malaysian ringgit and South Korean won in the broader context of proposals under a Trump 2.0 administration," it added.

Across Asia, "export-oriented currencies such as the South Korean won, Malaysian ringgit, Singapore dollar, and New Taiwan dollar will likely be more negatively affected, but the Philippine peso and Indonesian rupiah will be more insulated," MUFG said, adding that it expects "some reprieve for several Asian currencies in the second half of 2025 on a possibly weaker US dollar."

MUFG forecasted the Philippines' gross domestic product (GDP) to grow by 5.5 percent this year—below the government's downscaled six- to 6.5-percent goal, before hitting a within-target growth rate of 6.3 percent next year.

Next year's faster GDP growth would be supported by easing inflation, which MUFG projected to drop to 3.2 percent in 2024 and 2.7 percent in 2025—within the two- to four-percent range of year-on-year price hikes deemed manageable and conducive to economic growth—from last year's six percent, which was the highest annual rate since the 8.2 percent recorded in 2008 at the height of the global financial crisis.

"2024 has no doubt been challenging for the Philippine economy, with the combined impact of a multitude of back-to-back typhoons together with associated meaningful flooding likely weighing further on activity in the fourth quarter," Wan noted.

"Nonetheless, we note some signs of bright spots from a local perspective as we look forward into next year, putting aside global factors such as the impact of Trump for now," he added.

"For one, inflation is likely to come off further as domestic rice prices come down... We continue to forecast the BSP to have policy space to cut and normalize rates further which should provide a boost to domestic demand with some lag," Wan pointed out.

"We should also increasingly get a boost to private consumption in the first half of 2025 as spending on the midterm elections gets disbursed... We expect infrastructure spending rollout to remain a priority for the government. Last but not least, the Philippines' recently approved CREATE MORE Act should help lower effective corporate taxes and ease cost of doing business," he said, referring to the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy Law enacted by President Ferdinand R. Marcos Jr. last November.

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