Further BSP, Fed policy easing may stabilize market sentiment

FURTHER RATE CUTS from both the Bangko Sentral ng Pilipinas (BSP) and the US Federal Reserve could put some pressure on the peso in the near term, but may help stabilize markets and investor sentiment, analysts said.

“Both the Fed and the BSP signaling room for another rate cut generally point to a more supportive liquidity backdrop… One more cut from both central banks would likely put more mild pressure on the peso’s depreciation as rate differentials remain, while also increasing demand for government securities in the short term as investors can take advantage of lower policy rates and softer yield expectations,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in a Viber message.

“In the medium term, further easing could help stabilize financial conditions and partially support risk sentiment.”

The BSP on Dec. 11 delivered a fifth straight 25-basis-point (bp) reduction in benchmark borrowing costs, bringing the policy rate to an over three-year low of 4.5%.

It has lowered benchmark rates by a total of 200 bps since its easing cycle began in August 2024. BSP Governor Eli M. Remolona, Jr. has left the door open to one final 25-bp cut this year to help boost the economy amid a dismal outlook due to a wide-ranging corruption scandal involving government infrastructure projects, which has affected public spending and investor confidence.

The Monetary Board will hold its first meeting for this year on Feb. 19.

Meanwhile, the Fed cut by 25 bps for a third consecutive time at its Dec. 9-10 meeting to bring its target rate to the 3.5%-3.75% range. It next meets on Jan. 27-28, with investors currently expecting the central bank to leave its benchmark rate unchanged, Reuters reported.

The Fed agreed to cut interest rates at its December meeting only after a deeply nuanced debate about the risks facing the US economy right now, according to minutes of the latest two-day session.

Even some of those who supported the rate cut acknowledged “the decision was finely balanced or that they could have supported keeping the target range unchanged,” given the different risks facing the US economy, according to the minutes released on Tuesday.

“Most participants” ultimately supported a cut, with “some” arguing that it was an appropriate forward-looking strategy “that would help stabilize the labor market” after a recent slowdown in job creation.

Others, however, “expressed concern that progress towards the committee’s 2% inflation objective had stalled.”

“One more rate cut from BSP and Fed would likely pull yields lower and keep demand for GS (government securities) strong as investors position for a prolonged easing cycle. For the Philippine peso, additional cuts may cause mild short-term pressure, but this should be manageable if global conditions remain stable and inflows hold,” Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said in a Viber message.

However, further policy accommodation by both central banks may not be enough to boost investor sentiment, he said.

“While rate cuts help liquidity and valuations, they may not be enough to fully offset weak sentiment from slower growth expectations. Monetary easing can cushion markets, but restoring confidence will still depend on improved growth prospects, fiscal execution, and clearer policy signals.”

In 2025, global financial markets were roiled by US President Donald J. Trump’s shifting trade policies that he said are meant to reestablish the world’s largest economy’s dominance, as well as geopolitical concerns.

In the Philippines, the graft scandal linking officials of the Public Works department, lawmakers, and private contractors to corruption in allegedly anomalous flood control projects also weighed on investor sentiment, especially in the second half of the year, causing stocks to hit multi-year troughs and the peso to post fresh record lows. — A.M.C. Sy with Reuters