Japanese financial giant MUFG Bank, Ltd, now sees the Philippine peso weakening at a deeper level, as the sudden shift in the Bangko Sentral ng Pilipinas’ (BSP) tone has also made the market more expectant of about two additional cuts.

“We now pencil in the BSP cutting rates to 4.25 percent by the second quarter of 2026, which is one additional rate cut relative to what we were previously expecting,” said Michael Wan, senior currency analyst at MUFG Global Markets Research. Wan also switched to this rate as his expected terminal rate.

HSBC ASEAN economist Aris Dacanay has also adjusted his slower-paced easing outlook to more aggressive, but relative to Wan, Dacanay sounds less dovish.

“Given the dovish remarks by the BSP [last week], we adjust our policy rate forecast and expect a faster easing cycle from before,” Dacanay said. He previously expected the BSP to resume easing after a cut to 4.75 percent in early 2026, but now sees it taking place as early as December.

Dacanay anticipates the key lending rate to stay at 4.5 percent through 2026 and 2027.

Apart from a more dovish outlook for the key policy rate, Wan also said in a commentary published last Friday, Oct. 10, that the central bank could continue to reduce its reserve ratio requirement (RRR) from the current five percent to four percent early next year.

Wan noted that further easing in both the key borrowing costs and RRR would mean less support for the local currency.

“We correspondingly shift our United States (US) dollar-peso forecast higher, and see the foreign exchange (forex) pair moving to 57 by the second quarter of 2026 from 56.50 previously, reflecting the additional BSP rate cuts,” Wan said.

It can be noted that the peso depreciated after the BSP delivered a surprise reduction worth a quarter of a point during the policy-setting Monetary Board’s (MB) fifth policy meeting last week. BSP Governor Eli M. Remolona Jr. likewise said the central bank will not defend the local currency from the impact of foreign fund outflows, but it will in a sharp-peso-drop scenario.

From a spot of P58.31:$1, Wan expects the forex rate to go down to P57.5:$1 in the fourth quarter of the year, before sliding further to P57:$1 through the second quarter of 2026. Beyond the first half of 2026, however, the peso is expected to lose footing against the greenback, at P57.5:$1 and P58:$1 in the third and fourth quarters of next year, respectively.

Wan said that the bank’s global team expects the US to further ease and the US dollar to weaken. This means the peso could exert a stronger force against the dollar.

However, Wan stressed that “political risks both in Japan and France are at the moment providing some support for the dollar, and the evolution of these political risks will be key as well for the US dollar-peso exchange rate.”

While the changes in MUFG’s forecasts “imply somewhat less support for peso, what will also matter for forex is the extent of growth slowdown, and also the resultant impact on key flow dynamics such as the current account deficit, FDI [foreign direct investment] inflows, and to a smaller extent portfolio flows,” Wan argued.

For the medium term, the BSP has become more downbeat about hitting the gross domestic product (GDP) growth targets of at least 5.5 percent this year and at least six percent next year. The BSP earlier said it is less likely to expand faster, given the serious drag from the large-scale alleged corruption in flood control and infrastructure funds.

Remolona had said the local economy may only expand by 5.3 percent, down from the BSP’s higher 5.6 percent forecast. However, “the combined and lagged impact of lower rates and inflation should provide further support for domestic demand, including both consumption and investment,” Wan said.

Meanwhile, MUFG maintains that the peso remains supported by rice prices, aside from other local risks.

Wan asserted that domestic rice costs remain low based on the bank’s data. These lower costs can be attributed to previous cuts in rice import tariffs, weak global rice prices, and sufficient domestic inventories.

“As such, inflation should remain manageable even through 2026 (notwithstanding risks from rice import ban changes),” Wan said. This parallels with the BSP’s lowered inflation expectations for 2026 ad 2027 to 3.1 percent (from 3.3 percent) and 2.8 percent (from 3.4 percent) respectively.

Wan also noted that infrastructure projects, particularly in renewable energy, remain strong. These are anchored to government support and previous easing of foreign investment rules in the sector.

“This has also translated into a previous surge in FDI approvals, and our expectation is that some of these should start to filter through into a pickup in actual FDI over the next few months,” Wan added.