IMF projects more BSP rate cuts in Q1 2026

MANILA, Philippines — The Philippines could see additional interest rate cuts next year, the International Monetary Fund (IMF) said, as a favorable inflation outlook gives the Bangko Sentral ng Pilipinas (BSP) enough room to ease monetary policy and support a slowing economy.

In its latest country report, the IMF projected an additional 50 basis points reduction in the central bank’s overnight borrowing rate—the key benchmark for bank lending—in the first quarter of 2026 to 4 percent.

The report was finalized on Dec. 7, ahead of the central bank’s previous rate decision on Dec. 11.

With inflation expected to return to the midpoint of the BSP’s 2-to-4-percent target band, the IMF said the additional rate cuts would push the real interest rate “toward the lower bound” of its estimated natural rate range.

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But the Washington-based fund said any decision should remain guided by the impact of the new incoming data on the inflation outlook amid “prevailing uncertainties around the output gap and the natural rate and two-sided risks to inflation.”

“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 IMF said.

“Clear and effective communication remain important to manage expectations,” it added.

President Marcos’ economic team earlier signaled that official macro targets may need to be revised to account for the fallout from an escalating antigraft drive.

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To “compensate” for the effects of the graft fallout, the BSP slashed the policy rate by another quarter point to 4.5 percent at the Monetary Board’s final policy meeting for the year.

This brought the cumulative reductions since the easing cycle started in August last year to 2 percentage points.

Market concerns

Governor Eli Remolona Jr. had said that any further rate easing next year—if they come at all—is likely to be limited to a single 0.25 percentage point reduction. The BSP chief also said the central bank would still avoid outsized cuts and off-cycle decisions that may stir market concerns about the economy.

In the same report, the IMF said local authorities also see scope for a more relaxed monetary policy stance, while taking a data-dependent approach.

“They highlighted that 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 warrant a more accommodative stance,” the fund said. INQ