BSP cuts expected to drive peso lower

Japanese financial giant MUFG Bank, Ltd, now sees the Philippine peso weakening at a deeper level, as the sudden shift in the Bangko Sentral ng Pilipinas’ (BSP) tone has also made the market more expectant of about two additional cuts.

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“We now pencil in the BSP cutting rates to 4.25 percent by the second quarter of 2026, which is one additional rate cut relative to what we were previously expecting,” said Michael Wan, senior currency analyst at MUFG Global Markets Research. Wan also switched to this rate as his expected terminal rate.

HSBC ASEAN economist Aris Dacanay has also adjusted his slower-paced easing outlook to more aggressive, but relative to Wan, Dacanay sounds less dovish.

“Given the dovish remarks by the BSP [last week], we adjust our policy rate forecast and expect a faster easing cycle from before,” Dacanay said. He previously expected the BSP to resume easing after a cut to 4.75 percent in early 2026, but now sees it taking place as early as December.

Dacanay anticipates the key lending rate to stay at 4.5 percent through 2026 and 2027.

Apart from a more dovish outlook for the key policy rate, Wan also said in a commentary published last Friday, Oct. 10, that the central bank could continue to reduce its reserve ratio requirement (RRR) from the current five percent to four percent early next year.

Wan noted that further easing in both the key borrowing costs and RRR would mean less support for the local currency.