IMF sees room for big rate cut

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December 27, 2025 | 12:00am

Up to 50 bps likely in Q1

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to further reduce its policy rate amid a favorable inflation outlook and rising downside risks to growth, according to the International Monetary Fund. 

The IMF, in its staff report for the 2025 Article IV Consultation, said its baseline projection “incorporates another 50-basis-point reduction in the policy rate” by the first quarter of 2026. The cuts are expected to bring the real interest rate toward the lower bound of the IMF’s estimated natural rate range. 

“With headline inflation below the midpoint of the target band, expectations anchored and an emerging negative output gap in 2025, the projected accommodative stance is appropriate,” the report said.

However, the IMF emphasized that monetary policy should remain data-driven, with the BSP guided by new information on the inflation outlook amid uncertainty over the output gap, the natural rate and two-sided inflation risks.

It also urged the BSP to remain vigilant regarding financial conditions and monitor liquidity risks when considering further adjustments to banks’ reserve requirements. 

“Clear and effective communication remains important to manage expectations. The BSP’s discussion of alternative scenarios in its latest Monetary Policy Report is welcome in that regard,” the multilateral lender added. 

On the exchange rate, the IMF said the central bank should continue to act as a buffer against external shocks.

“The BSP has appropriately allowed the exchange rate to function as a shock absorber amid rising global volatility and should continue to do so,” it said.

While foreign exchange intervention may still be warranted in certain cases, the IMF cautioned against overuse. 

Given the country’s “occasionally shallow forex markets and the nonlinear impact of exchange rate fluctuations on inflation expectations, forex intervention can play a role in mitigating risks associated with abrupt exchange rate movements, supported by adequate reserve coverage,” it said. 

At the same time, the IMF stressed that forex intervention should be temporary and not a substitute for macroeconomic policy adjustments, particularly in light of the country’s weaker external position. 

The IMF warned that frequent intervention could “hinder forex market development, create moral hazard and undermine the effectiveness of the inflation targeting regime.”

Philippine authorities said they see room for a more accommodative monetary policy stance, but stressed the importance of flexibility. 

They pointed to “weaker growth prospects – reflecting in part the impact of recent governance concerns about public infrastructure spending on business confidence and implementation of projects in the near-term – as well as a benign inflation outlook” as reasons supporting a looser stance.

The BSP agreed that “the uncertainty around the natural rate and the output gap calls for taking a data-dependent approach,” noting that it “continuously evaluates its estimates and will remain attentive to emerging risks.”

The BSP’s Monetary Board reduced the target reverse repurchase rate by 25 basis points to 4.50 percent at its Dec. 11 policy meeting. The BSP has so far reduced borrowing costs by 200 basis points since it began its easing cycle in August last year.

On foreign exchange intervention, the authorities said it remains limited to cases “where depreciation is sufficiently sharp and large to pose risks to inflation and de-anchoring of inflation expectations,” adding that the forex market is deep and has not faced liquidity issues.