The Bangko Sentral ng Pilipinas (BSP) may not be able to sustain a monetary easing stance after last week’s interest rate cut as fresh geopolitical risk threatens to reignite inflationary pressures, analysts said over the weekend.
On June 19, Thursday, the Monetary Board reduced the benchmark overnight reverse repurchase rate by 25 basis points to 5.25 percent — a move widely anticipated by the market.
Followed by the flaring of the Middle East conflict and with oil prices on the rise, however, further cuts may now be harder to support, the analysts said.
“If the conflict escalates, it could even prevent the BSP from cutting rates further,” Jun Neri, lead economist at Bank of the Philippine Islands, said. “Oil-driven inflation and peso weakness pose clear upside risks to prices.”
Neri warned against an overly aggressive easing cycle, noting that inflation — not high interest rates — has been the main drag on economic growth.
“A cautious stance remains warranted. Containing inflation should remain the top priority,” he said. “High inflation has been a bigger factor in the slowdown of GDP growth than the current level of policy rates.”
He added that domestic risks — such as potential wage hikes and supply shocks during typhoon season — could further complicate the BSP’s inflation outlook. While the central bank went ahead with a cut despite the peso’s depreciation, Neri noted that the BSP has other tools to manage currency volatility.
Mid-East conflict clouds outlook
Nomura analyst Euben Paracuelles echoed the dovish tone but said the path ahead remains data-dependent.
“The BSP’s forward guidance remains accommodative,” he said, noting Nomura’s forecast for another 50 basis points of easing this year to bring the policy rate to 4.75 percent. “But that forecast hinges on stability. An escalation in the Middle East, coupled with rising oil prices, could delay or halt those cuts.”
He added that a pause is possible if signs of domestic economic improvement emerge.
Still, Paracuelles downplayed the inflationary impact of current oil price movements, calling the recent uptick “insufficient to breach the BSP’s 2–4 percent target,” unless a sustained price shock occurs.
Peso manageable for now
Sanjay Mathur, ANZ’s chief economist for Southeast Asia and India, sees no need for alarm at this point, saying the peso’s recent slide is still manageable and not yet a threat to the BSP’s inflation mandate.
“So far, the depreciation has been relatively small and does not require central bank intervention,” Mathur said, attributing the move largely to a stronger US dollar amid geopolitical uncertainty.
Mathur projected two more 25-bps rate cuts by the BSP in the second half of 2025, eventually bringing the terminal policy rate to 4.75 percent.
“With inflation forecast at just 1.6 percent in 2025, the real interest rate would remain elevated even after additional easing,” he said. “That opens the door for more cuts, assuming geopolitical pressures subside.”
The BSP recently downgraded its inflation forecast for 2025 from 2.4 percent to 1.6 percent, citing moderating food prices and slowing economic activity despite higher oil costs.
Policy balancing act
While Thursday’s rate cut reaffirmed BSP’s bias toward supporting growth, analysts say the central bank now faces a delicate balancing act — easing enough to aid recovery without undermining inflation control or financial stability.
Much will depend on how the global oil market and the peso behave in the coming weeks, as well as whether the Middle East crisis deepens or de-escalates.
