Manila: A total of 50 basis points (bps) is expected to be reduced from the Bangko Sentral ng Pilipinas' (BSP) key rates by 2026 as inflation is projected to return to the central bank's target band.

According to Philippines News Agency, a report by the Metropolitan Bank and Trust Company (Metrobank) issued Wednesday indicated that the bank forecasts inflation to accelerate to between 2 percent and 4 percent this year, primarily driven by base effects. In 2025, the rate of price increases averaged at 1.7 percent, below the 2 percent to 4 percent target band.

Last December alone, inflation accelerated to 1.8 percent from the previous month's 1.5 percent, influenced by the impact of weather disturbances on agricultural products, among other factors. The report stated, "Within-target inflation, together with still-soft economic activity and subdued consumer and investor sentiment, should provide leeway for the BSP to reduce the policy rate further to its terminal rate."

The report further detailed that the projected cuts in the BSP rates this year "would bring the target reverse repurchase (RRP) rate towards its terminal rate, which we project at 4.00 percent by end-2026, allowing the interest rate differential (IRD) with the (US) Fed (Federal Reserve) to widen to around 125 bps." Since 2024, the BSP's key rates have been reduced by a total of 200 basis points, primarily driven by the manageable domestic inflation rate.

The report forecasts inflation to average at 3.3 percent in 2026 and 3 percent in 2027, with the increases anticipated to be partly driven by demand-side pressures due to expected growth in household consumption and higher commodity prices resulting from the impact of US tariff policies.

In terms of the Philippine peso, the report predicts a weakening against the US dollar as the greenback strengthens and due to weak investor sentiment. "Although resilient exports amid US tariffs will help narrow the current account deficit, it is expected to remain wide. Coupled with an anticipated recovery in dollar strength, driven by stronger growth in the US, these assumptions will continue to weigh on the peso and offset gains from the anticipated wider IRD (interest rate differential) between the Fed and the BSP next year," it added.