With inflation remaining benign and the economy recently slumping, banks and a think tank have raised expectations that the Bangko Sentral ng Pilipinas (BSP) is likely to reduce its key interest rate by a quarter point on Thursday.

Foreign lenders DBS Bank Ltd. and ANZ Bank Ltd. forecast the policy-setting Monetary Board (MB) will deliver a quarter-point reduction, lowering the key policy rate to 4.5 percent from the current 4.75 percent.

If the BSP decides on another easing, this week's cut would bring the total reductions since the easing cycle began last year to two percentage points (ppt). This would also mark the fifth easing move in 2025.

DBS Economic Research economists believe the central bank will remain dovish after this week's expected easing, “given the ongoing slowdown in government spending.”

“Within-target inflation will provide the central bank room to shift focus to the weakening growth outlook due to the corruption scandal and resultant depressed sentiment,” the Singaporean bank said in a commentary published last Friday, Dec. 5.

Inflation in November was the slowest in four months at 1.5 percent, marking the ninth consecutive month the rate has clocked in below the BSP’s two percent to four percent target band, which the government deems manageable and conducive to economic growth.

Economic growth slumped to four percent in the third quarter, a data point ANZ believes has reinforced the central bank's dimmer outlook. ANZ noted the third-quarter gross domestic product (GDP) data also showed “clear signs of a slowdown in public infrastructure spending.”

“We do not foresee a recovery in government expenditure until these governance issues are addressed,” ANZ said.

Citing its expectation of a lackluster economy over the medium term, coupled with capped consumer prices, ANZ supports the likelihood of another 25 basis-point (bp) cut in the first quarter of 2026, which would bring the terminal rate to 4.25 percent. ANZ, however, remains less dovish than the market consensus expectation of a four percent terminal rate.

Economic think tank Capital Economics noted that the Philippines’ main struggle is sluggish output expansion even before a string of typhoons ravaged the country. The 4.5 percent low output growth was not even attributed to the impact of calamities that distressed the rural areas.

Capital Economics recalled that the steep slowdown was driven by a 13.3 percent quarter-on-quarter drop in government construction, which followed the delayed implementation of projects “to investigate corruption allegations.”

Gareth Leather, senior economist at Capital Economics, said the effects of the corruption scandal “will continue to be felt over the coming quarters,” a likely direction of growth based on survey data the think tank cited.

“One risk is that there is fresh unrest, although the evidence from emerging markets (EMs) is mixed when it comes to the impact on activity,” Leather said. Mass demonstrations, also known as the Trillion Peso March, began in September to demand accountability for the anomalous implementation of flood mitigation infrastructure allegedly involving public officials.

“A bigger concern is that uncertainty weighs on private investment. At the same time, individuals may avoid purchases of major assets such as land or property. And the government could clamp down further on public spending projects,” Leather noted.

Leather has also penciled in a 25-bp reduction in the benchmark rate, given the BSP’s latest hint that weak growth has raised the chances of a rate cut this week. Leather also expects two more quarter-point cuts next year, which would bring the rate to four percent.

Concurring with Leather, Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri Jr. said a gradual easing could also lower the current rate to 4% next year. Neri added that further easing would buoy the economy, which “will likely depend more on monetary policy in the near term given the constraints on fiscal spending.”

“Nevertheless, excessive rate cuts may carry risks, as inflation could rise again in 2026. An overly aggressive easing cycle could force the BSP into an abrupt reversal should inflation pick up unexpectedly, potentially leading to sharper-than-ideal rate hikes later on,” Neri explained.