MANILA - The Bangko Sentral ng Pilipinas (BSP) is likely to opt for a modest 25 basis points rate cut in its next policy meeting, rather than a more aggressive 50 bps reduction, according to an official of Bank of the Philippine Islands.

The BSP is set to hold its next monetary policy-setting meeting on Oct. 16, with some analysts expecting it to follow up its previous 25 bps cut with a "jumbo" rate reduction.

This is after the September inflation print turned out to be lower than even the BSP's forecast range. A significant slowdown in rice inflation was cited as a major factor for the lower headline inflation rate.

But BPI Senior Vice President and lead Economist Emilio Neri Jr. said that while inflation slowed to 1.9 percent last month, "there are several factors that warrant a more cautious approach" for the BSP.

He said supply disruptions can still happen, and a potential La Niña event and a possible increase in African Swine Fever cases could push prices of commodities higher.  

"A gradual reduction in the policy rate would help the economy withstand the impact of these risks in case they materialize," Neri said.

He added that GDP growth remains strong despite monetary policy remaining tight. The economy is also expected to get a boost from election related spending, better weather and slower inflation in the coming months "reducing the need for massive rate cuts."

Neri also noted the country's increasing external debt which has led to a decline in the foreign reserves-to-external debt ratio of the Philippines from 112 percent to 86 percent.

"Maintaining a positive interest rate differential helps the BSP rebuild its foreign reserves. It also helps in maintaining a certain degree of stability in the FX market," he added.

Other external factors that could affect the economy include: a potential increase in trading costs due to the rise of protectionism, worsening conflict in the Middle East that could drive oil prices higher, and a resilient US economy that could prevent the Federal Reserve from cutting rates aggressively, the BPI economist said.

"The recent movement of the Peso from 55.800 to 57.300 in the span of two weeks underscores the impact of these risks and how market sentiment can quickly change. In this context, aggressive rate cuts may not be prudent, as they could heighten market volatility."