BSP cuts policy rate to 4.75% amid easing inflation

MANILA — The Bangko Sentral ng Pilipinas (BSP) on Thursday announced a 25-basis-point cut in its key policy rate, bringing the target reverse repurchase rate to 4.75 percent as it cited a benign inflation outlook and moderating economic momentum.

The Monetary Board also reduced the interest rates on the overnight deposit and lending facilities to 4.25 percent and 5.25 percent, respectively, during its Oct. 9 policy meeting, according to highlights released Friday.

“The favorable inflation outlook and moderating domestic demand provided scope for a more accommodative monetary policy stance to support economic activity,” the central bank said, adding that future policy adjustments will remain data-dependent.

Inflation outlook remains within target

The BSP projected average headline inflation to fall below its target band of 3.0 percent ±1.0 percentage point, settling at 1.7 percent in 2025.

The inflation forecast for 2026 was revised downward to 3.1 percent from 3.3 percent, while the 2027 outlook declined to 2.8 percent from 3.4 percent.

The BSP said upside risks for 2026 and 2027 stem from potential changes in rice policies and base effects, though these risks are seen as manageable due to declining global oil prices and easing domestic cost pressures.

Headline inflation edged up to 1.7 percent in September from 1.5 percent in August, driven by higher domestic diesel prices and a slower decline in gasoline prices.

Vegetable prices rose due to adverse weather conditions, while rice prices eased on strong domestic supply and lower global prices.

Core inflation slowed to 2.6 percent in September from 2.7 percent in August.

Private sector expectations indicate inflation will stay below 2.0 percent in 2025 and hover near the midpoint of the target range over the medium term.

Domestic growth slows on weak sentiment, typhoon damage

The BSP said domestic economic momentum has softened amid weaker business confidence, partly reflecting concerns over alleged corruption in infrastructure projects and delays in flood control initiatives.

It said public infrastructure spending is expected to moderate and could dampen investor sentiment.

Gross domestic product growth is projected to fall slightly short of government targets for 2025 and 2026 before rebounding in 2027.

The slowdown is attributed to typhoon-related agricultural damage, sluggish construction activity, and softer demand in the services sector.

The BSP said fiscal reforms aimed at reducing leakages may improve budget efficiency and support growth in the medium term.

National government spending rose 8.2 percent in July, while revenues increased 4.8 percent, resulting in a 22.0 percent expansion of the fiscal deficit for the month.

External and financial conditions supportive

On the external front, the BSP said global growth has stabilized following new trade agreements and that global oil prices remain relatively subdued.

It said ASEAN central banks have begun lowering policy rates in response to easing inflation and external uncertainties, with some signaling readiness for further cuts.

Depreciation pressures on the Philippine peso have eased due to a softer U.S. dollar, low domestic inflation, and stable credit ratings.

Bank lending grew 11.8 percent year-on-year in July, slightly below the 12.1 percent recorded in June.

The BSP said financial conditions have improved with the ongoing easing cycle.

It said lending rates, especially for consumer loans, have declined, although the full pass-through of prior rate cuts has yet to materialize.

Credit demand remains stable and bank lending standards steady, the central bank added.

Sectoral updates: Rice, pork, oil, and utilities

In the agriculture sector, rice inflation declined in September due to strong harvests, lower global prices, and government interventions.

Pork prices, however, remain elevated amid supply bottlenecks and a slow industry recovery.

In the energy sector, electricity rates for typical households rose in August from July due to higher generation charges and more frequent capacity outages.

The BSP expects electricity prices to fluctuate through 2026 because of regulatory adjustments, fuel cost recoveries, and legal rulings.

Oil prices fell in September as OPEC+ prepared to raise production in October, but domestic fuel prices continued to increase on a monthly basis.

Crude oil futures for Brent and Dubai remain in backwardation through 2026, with gradual increases projected in early 2027.

The BSP said its next monetary policy meeting is set for Dec. 11, 2025.

“Future monetary policy adjustments will continue to be guided by evolving risks to inflation and growth,” the central bank said.