Bangko Sentral cuts policy rate as ‘painful’ corruption woes mute growth outlook

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'The cut will revive economic activity a bit at a time when painful governance issues around infrastructure investments have weakened government spending, business confidence, and domestic demand,' says Bangko Sentral ng Pilipinas Governor Eli Remolona Jr.

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) slashed the country’s key interest rate to 4.5% on Thursday, December 11, amid a faster inflation forecast and weaker outlook on economic growth.

BSP Governor Eli Remolona Jr. noted that the monetary authority has shed 2% off the policy rate since August 2024.

“The cut will revive economic activity a bit at a time when painful governance issues around infrastructure investments have weakened government spending, business confidence, and domestic demand,” he said.

Interest rates are one of many tools a central bank can use to control inflation. A lower interest rate means cheaper borrowing costs, encouraging people to spend more and stimulate the economy.

Although the central bank downgraded its 2025 inflation forecast to 1.6%, it hiked its inflation outlook for 2026 and 2027 to 3.2% and 3%, respectively.

Remolona noted that business and consumer confidence remains tepid amid ongoing investigations into alleged corruption in public works and within the Bureau of Internal Revenue. Because of this, the BSP expects the economy to recover only by the second half of 2026.

“I think the main factor would still be the governance issue. [When] investors and consumers feel that those issues are being addressed, then we should see some recovery,” he explained.

The Philippine economy grew only 4% in the third quarter — the lowest since the COVID-19 pandemic — as government infrastructure spending plunged to a 14-year low due to the flood control scandal.

While reforms in fiscal policy or the use of taxation and spending to manage an economy would still play a bigger role in resolving governance issues, Remolona said monetary policy can compensate for the negative effects brought by weak consumer and business sentiment.

With the latest rate cut, the BSP said it may be nearing the end of its easing cycle. Moving forward, additional rate cuts may be limited and will assess the impact of previous reductions on the economy.

Remolona said it may take one to two years before the economy feels the full effect of the rate cuts.

“We also hope that government infrastructure spending will return to normal levels and be more effective with reduced leakages, and that investor sentiment and consumer sentiment will improve,” he said. – Rappler.com