The Bangko Sentral ng Pilipinas (BSP) is actively steering the Philippine economy through a complex global landscape, as evidenced by its latest monetary policy adjustments and the recent Balance of Payments (BOP) data for May 2025.
In a move aimed at fostering sustainable growth amidst moderating inflation forecasts, the Monetary Board has opted for a 25-basis point reduction in the Target Reverse Repurchase (RRP) Rate, now set at 5.25 percent.
This decision, along with adjustments to the overnight deposit and lending facilities, signals a strategic pivot towards a more accommodative monetary policy stance.
BSP balances global risks with local growth needs
The rate cut, announced following the latest monetary policy meeting, reflects the BSP’s confidence in a more subdued inflation outlook. Projections for 2025 have seen a notable decrease, falling from 2.4 percent to a more comfortable 1.6 percent.
While forecasts for 2026 and 2027 saw marginal upticks to 3.4 percent and 3.3 percent respectively, inflation expectations are deemed “well anchored,” providing the central bank with room to maneuver.
The BSP’s decision, however, isn’t solely driven by domestic inflation trends. The Monetary Board also took into account a broader picture of global economic deceleration, primarily influenced by ongoing uncertainty over US trade policy and the persistent conflict in the Middle East.
These external factors are anticipated to temper growth in the Philippines, adding a layer of complexity to the country’s economic outlook. Furthermore, potential inflationary pressures from rising oil prices, adjustments to electricity rates, and higher rice tariffs are being closely monitored.
Despite the easing of monetary policy, the central bank remains vigilant. “Emerging risks to inflation from rising geopolitical tensions and external policy uncertainty require closer monitoring,” the Monetary Board stated, affirming its commitment to continually assess the impact of prior policy adjustments to safeguard price stability and support economic growth and employment.
Balance of Payments sees May deficit, reserves remain robust
Adding to the nuanced economic picture, the Philippines’ Balance of Payments (BOP) registered a US$298 million deficit in May 2025. This marks a notable reversal [1] from the US$2.0 billion surplus recorded in May 2024. The deficit primarily stemmed from the National Government’s (NG) drawdowns on its foreign currency deposits with the BSP, utilized for servicing external debt obligations.
Consequently, the year-to-date BOP shifted from a US$1.6 billion surplus in January to May 2024 to a US$5.8 billion deficit for the same period in 2025. Preliminary data [2] indicate that this cumulative deficit was largely attributable to a continued trade in goods deficit, although sustained net inflows from overseas Filipino remittances, foreign borrowings by the NG, and foreign portfolio investments provided a partial offset.
The BOP position also mirrored a slight dip in the country’s Gross International Reserves (GIR), which decreased marginally from US$105.3 billion at end-April 2025 to US$105.2 billion by end-May 2025. However, the BSP was quick to reassure that despite this modest decline, the GIR level remains a strong external liquidity buffer. [3]
It is sufficient to cover 7.1 months’ worth of imports of goods, services, and primary income payments, far exceeding the international adequacy standard of three months. Moreover, it covers approximately 3.3 times the country’s short-term external debt [4] based on residual maturity, underscoring the Philippines’ robust capacity to absorb potential external shocks.
In essence, while the recent BOP deficit presents a challenge, the underlying strength of the country’s external liquidity position, coupled with the BSP’s proactive and accommodative monetary policy stance, aims to create a stable environment for sustained economic development. The coming months will be crucial in observing how these multifaceted factors interact and shape the Philippines’ financial trajectory.
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[1] The GIR consists of foreign assets held by the BSP, primarily in the form of foreign-issued securities, gold, and foreign exchange, which serves as key indicator of the country’s ability to manage external shocks.
[2] Based on the preliminary data from the Philippine Statistics Authority’s (PSA) International Merchandise Trade Statistics (IMTS), the trade deficit for January-April 2025 settled at US$15.91 billion, down from the US$15.99 billion deficit posted in January-April 2024.
[3] Specifically, the latest GIR level ensures availability of foreign exchange to meet balance of payments financing needs, such as for payment of imports and debt service, in extreme conditions when there are no export earnings or foreign loans.
[4] Short-term debt based on residual maturity refers to outstanding external debt with original maturity of one year or less, plus principal payments on medium- and long-term loans of the public and private sectors falling due within the next 12 months.
