After the peso has fallen to a record-low level of ₱59 against the United States (US) dollar, its recovery could be “shallow,” largely because the greenback is also expected to weaken early next year, according to Japanese financial giant MUFG Bank Ltd.

“We are forecasting the Philippine peso to recover modestly to the ₱58 levels in the first half of 2026 as the [US] dollar weakens,” MUFG Global Markets Research senior currency analyst Michael Wan said in a Dec. 12 report.

“But we see this FX [foreign exchange] move as being shallow given a relatively dovish BSP [Bangko Sentral ng Pilipinas],” Wan added.

MUFG expects the peso to end 2025 at ₱58.7:$1 before appreciating to ₱58:$1 during the first half of next year. However, the local currency is seen depreciating to ₱58.5:$1 in the third quarter and further weakening to ₱58.8:$1 by the fourth quarter of 2026.

MUFG also expects government spending to improve as the impact of the flood-control corruption scandal on public expenditures dissipates starting next year, providing support to the currency.

The peso sank to its historic low of ₱59.22 versus the US dollar on Dec. 9.

“Our base case is that government spending should pick up next year, but with growth remaining below trend with a still negative output gap. Past episodes of corruption issues in the Philippines such as the 2013 priority development assistance fund (PDAF) suggest government spending should start to improve after around six months, but importantly full normalization will likely only come more than a year later,” Wan said.

This expectation provides space for the BSP to reduce the key interest rate by 25 basis points (bps) to 4.25 percent during the Monetary Board’s (MB) first policy meeting in 2026, from the current 4.5 percent, he said.

But “we still see the risks tilted toward more and earlier cuts by the BSP given below-trend growth and a still negative output gap, even as we agree directionally with the BSP’s assumption of some economic improvement in 2026,” he added.

MUFG forecasts Philippine gross domestic product (GDP) growth at 4.7 percent in 2025 and 5.1 percent in 2026, way below the government’s targets of 5.5- to 6.5-percent economic expansion for this year and six to seven percent for next year.

According to Wan, the BSP’s less dovish tone at its Dec. 11 policy meeting appears aimed at tempering market expectations for further rate cuts in 2026.

While BSP Governor Eli M. Remolona Jr. earlier suggested the neutral rate could be as low as four percent, the central bank last week said estimates vary and it is still assessing different models, placing less emphasis on the neutral rate for now, Wan noted.

He also noted that the BSP is now focusing more on traditional indicators such as the output gap, inflation, and growth projections, alongside the policy-setting MB’s judgment.

Wan likewise cited that the BSP reiterated it does not target the exchange rate directly, stressing that peso weakness would only significantly matter if it is sharp and accompanied by rising global commodity prices, amid the possibility of the currency sliding to ₱60:$1.