Japanese financial giant MUFG Bank Ltd. expects the Philippine peso to gradually recover next year, but flagged the Bangko Sentral ng Pilipinas’ (BSP) dovish tone as likely limit on the local currency’s winning streak against the United States (US) dollar.

“We forecast the peso to recover modestly, but this will be capped by a still dovish BSP, and with the current account deficit unlikely to narrow significantly despite softer domestic demand,” MUFG said in a foreign exchange (forex) outlook report published Monday, Dec. 1.

The peso slumped in recent months following the central bank’s unexpected interest-rate cut in October to 4.75 percent, an easing largely attributed to the unearthing of irregularities in flood control funds and a moderating economy.

MUFG noted that government public infrastructure spending “has slowed sharply on the back of flood control project corruption cases.” The bank cited this slowdown as a major reason the peso is not benefiting from the weaker dollar.

The peso first plunged to an all-time low of ₱59.13 per dollar on Oct. 28, a level breached again on Nov. 12 when it hit its current weakest-ever point of ₱59.17 per dollar.

The currency, however, fared at a steady pace against the greenback in November, MUFG noted.

“We expect the US dollar–peso to recover modestly to the ₱58 levels in the first half of 2026 as government spending improves and capital inflows pick up on the back of a recovery in growth and foreign direct investment (FDI) inflows,” the report read.

MUFG specifically forecast the peso to strengthen to the ₱58 per dollar level in the first half of 2026, but slip slightly near the ₱59 per dollar level before the end of 2026.

The Japanese bank pointed to several factors that could boost the peso, including “the strong momentum in the renewable energy sector, a robust pipeline of private investment commitments, and support for domestic demand from the lagged impact of lower inflation and rates.”

Since February, when inflation reached 2.1 percent, it has remained below the lower bound of the two percent to four percent target range. The inflation-targeting monetary policy easing has also led to a cumulative 175 basis points (bps) reduction in the key interest rate.

The report added the peso could get further support from recent US tariff exemptions for Philippine agricultural exports such as coconuts, which make up about six percent of the country’s exports to the US.

“Softer growth, uncertain fiscal impulse, and the continued negative output gap we forecast in the Philippines imply the BSP is likely to remain dovish moving forward,” MUFG said. The country’s gross domestic product (GDP) growth slowed sharply to four percent in the third quarter of 2025, the slowest quarterly expansion in four and a half years.

MUFG expects the policy-setting Monetary Board (MB) to further reduce key borrowing costs by a quarter of a percentage point, “and we see the risk tilted towards more cuts.”

If the MB moves at this pace, the current rate could be brought down to at least 4.25 percent.