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The Bangko Sentral ng Pilipinas (BSP) said its ongoing easing cycle will continue to boost banks’ lending, encourage borrowing, and support the growth momentum this year and in 2026.
In its latest December 2024 Monetary Policy Report (MPR) released on Wednesday, Jan. 29, the BSP said “a further cut in the policy rate will help reinforce the impact of the prior monetary easing on market interest rates, lending activity, and aggregate demand.”
It reiterated that the Monetary Board, its policy-making arm, will continue to keep a measured approach in gradually reducing the target reverse repurchase (RRP) rate to support economic growth and employment.
“On balance, there is scope for measured monetary policy easing given the within target inflation, manageable underlying price pressures and well-anchored inflation expectations. However, upside risks to inflation warrant close monitoring,” said the BSP in the report. The MPR serves as the Monetary Board's main forward guidance.
With inflation settling at 3.2 percent in 2024, which was within the government target of two percent to four percent, the BSP cut the key rate by a combined 75 basis points (bps) to 5.75 percent.
The central bank’s latest baseline inflation forecasts are 3.3 percent for 2025 and 3.5 percent for 2026. The consumer price index (CPI) is expected to be around the midpoint of the target range until the first half of 2025 because of the rice tariff reduction and negative base effects.
From the second half of 2025 to the first half of 2026, the BSP projects inflation will likely climb close to the upper end of the target due to the lagged impact of higher minimum wages and positive base effects.
By the second half of 2026, inflation could ease closer to the midpoint, supported by a continued decline in global commodity prices, said the BSP.
“The base effects for inflation are estimated to be positive on average from December 2024 to November 2025, except for February 2025 and July 2025. Both food and nonfood items are projected to positively contribute to the base effects over the next 12 months following the easing of supply-side pressures in 2024,” the BSP noted.
As to the balance of risks to the inflation outlook in 2025 and 2026, the BSP said the higher transport charges, upward adjustments in electricity rates, and higher domestic food prices are crucial factors.
The downside risks are the spillover effects of the lower tariffs on imported rice to local rice prices.
Taking all these risks, the BSP has a risk-related inflation forecast of 3.4 percent for 2025 and 3.7 percent for 2026 – both are still within the government target range.
While the easing cycle will boost growth, the BSP’s growth outlook remains subdued for 2025 until next year.
“The economy is anticipated to grow below potential over the near term amid subdued demand-side pressures,” said the BSP.
The BSP expects the economy will perform below the government target of six percent to 6.5 percent for 2024, however the gross domestic product (GDP) growth will likely improve albeit modestly and “settle close to the low end of the targets for 2025 and 2026” of six percent to eight percent.
“The decline in global oil prices, the easing of BSP’s monetary policy, and the reduction in the reserve requirement ratio (RRR) are seen to support domestic economic activity,” said the BSP.
It added that “domestic demand is expected to remain firm but subdued” while “investments and household consumption continued to support domestic demand” and household spending improved amid easing inflation despite weather-related disruptions which affected the pace of economic activity.
Based on the BSP's Policy Analysis Model for the Philippines (PAMPh), it forecasts the country’s output gap will remain negative until this year and in 2026 following the lower-than-expected economic expansion in the third quarter of 2024.
“Expansions in consumption and investment are seen to help narrow the output gap as the impact of previous monetary policy easing takes full effect. The closure of the negative output gap by 2026 will be supported by higher real wages following the recent minimum wage increases in 16 regions and the potential impact of further policy rate cuts,” said the BSP.
With BSP’s plans to further cut the RRR, this will release fresh bank funds and new loans for businesses and households, thereby boosting consumption and investment.
It noted that improved labor market conditions, continued investment growth and key reforms will sustain potential output. The BSP also expects productivity to increase with improved economic activity and stable infrastructure spending.
