The BSP surprised markets by cutting its policy rate by 25bp to 4.75%. The tone of the decision was clearly dovish, reflecting a combination of benign inflation dynamics and a deteriorating growth outlook. The Monetary Board signalled room for a more accommodative stance, citing both lower-than-expected inflation and emerging downside risks to growth.

While inflation has remained low - headline inflation in September was below the BSP's target band - the more significant driver appears to be concerns around growth. We've previously highlighted that any additional easing would require clear signs of economic weakness. Today's rate cut seems to have been triggered by mounting concerns over the likelihood of slowing public infrastructure spending, particularly in the wake of corruption scandals involving flood control projects.

According to government estimates, the Philippine economy may have lost as much as £1.48 billion over the past two years due to corruption in these schemes. Historical precedent suggests that increased scrutiny following such scandals often leads to a sharp pullback in government spending, posing further downside risks to growth.

Looking ahead, we will continue to monitor high-frequency indicators-particularly those related to business sentiment and government capital expenditure-for further signs of economic softening. Risks to our 2026 GDP growth forecast of 5.8% are clearly tilted to the downside. In addition to concerns about public infrastructure spending, lingering uncertainty over the impacts of tariffs on investment further compounds the risk.

Given this backdrop, we believe the likelihood of the final 25bp rate cut, currently pencilled in for the first quarter of next year, being brought forward to December has increased meaningfully.

The BSP appears relatively unconcerned about recent depreciation pressures on the PHP, likely due to contained inflation and expectations of rate cuts by the Fed later this year, which should help keep rate differentials broadly stable.

We believe robust foreign investor inflows into the debt market, combined with anticipated Fed easing, could provide near-term support for the PHP. Additionally, while any reduction in fiscal spending may weigh on GDP growth, it could help narrow the current account deficit, offering further support to the currency.

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