BSP keeps door open to more interest rate hikes

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) raised interest rates for a second straight meeting on Thursday and signaled further measured hikes amid broadening spillover effects of oil shocks stemming from the Middle East war.

The Monetary Board raised the target reverse repurchase rate by 25 basis points (bps) to 4.75%, matching the benchmark rate set in October 2025. This was the highest rate in nearly a year or since the 5% in August last year.

Rates on the overnight deposit and lending facilities were also lifted by 25 bps each to 4.25% and 5.25%, respectively.

The BSP’s latest move was in line with the projection of  15 of 20 analysts polled by BusinessWorld. The central bank had delivered a 25-bp increase at its April review.

The decision came as the central bank noted that inflationary pressures remain “strong,” with elevated oil and fertilizer prices still feeding into other key commodities.

“Given recent developments in the Middle East, the inflationary pressures remain strong,” BSP Governor Eli M. Remolona, Jr. told a press briefing at the BSP’s head office in Manila.

“Global oil and fertilizer prices are still elevated and continue to put pressure on domestic fuel and food prices. Core inflation continues to rise, indicating that inflation is spreading through second-round effects,” he added.

In a statement, the BSP said quickening core inflation also risks driving inflation expectations higher.

Core inflation breached the BSP’s 2%-4% target for the first time since December 2023 as it accelerated to 4.1% from 3.9% in the previous month.

Headline inflation has been above the central bank’s 2%-4% target since March, as fuel prices soared amid the Middle East war. However, inflation slightly eased to 6.8% in March from the over three-year high of 7.2% in April.

The BSP now sees inflation settling at 6.4% this year and 4.5% next year, slightly faster than its previous estimates of 6.3% and 4.3%, respectively.

By 2028, the headline print will return to their tolerance range but still above their point target at 3.1%, the central bank added.

Mr. Remolona said the faster inflation outlook came amid lingering uncertainties over the Middle East war and the lagged effects of the peace deal between the US and Iran.

“Even now, with the ceasefire apparently being signed, we’re still not sure what will happen,” he said. “Even if the Strait of Hormuz is open today, if there’s a ceasefire today, we will still need several months to rebuild the infrastructure before we can expect the price of oil to return to the levels before the conflict.”

The BSP chief also said the revisions have yet to account for the expected impact of the El Niño weather phenomenon.

“We know that this one could be unusually big. So, it is a big risk, but we’re still analyzing the potential effects of El Niño,” he said.

Meanwhile, BSP Deputy Governor Zeno Ronald R. Abenoja said core inflation will likely remain a tad above the target as second-round price effects from the oil shocks may take several months to be fully transmitted.

“We have observed, just like (the) governor has mentioned, the direct effect has been felt, but it will be a few more months until we see the spillover effects of the direct effect of the supply shocks,” he said.

“That will be reflected in the core inflation in succeeding months. So, it is possible that we could be a little above the 4% range for the rest of this year,” he added.

According to Mr. Remolona, their decision to not be aggressive in tightening may provide some relief to the struggling economy.

“We’re hoping it will help somewhat,” he said. “A sense of stability, I think, is important for consumption and investment. Growth has been disappointingly slow in the last few quarters, so we think that by not being too aggressive, it can maybe help the economy a little bit.”

The central bank also noted that its measured tightening is expected to support fiscal measures meant to boost domestic consumption and business sentiment amid weak growth momentum.

‘BABY STEP’ HIKES AHEAD
Meanwhile, the central bank left its door open to further monetary policy tightening as it wants to steer inflation back to its 3%-point target.

“There’s a hike that’s still possible,” Mr. Remolona said, adding that they have a “a lot of space” to tighten. “I think 25 bps is possible, 50 bps is possible depending on the data we see forward.”

However, the Monetary Board may continue to be inclined to “baby steps” or moving by 25 bps at a time, as Mr. Remolona noted that the anchoring of inflation is “not a big issue” for now.

Asked if a quarter-point increase is on the table at their next meeting on Aug. 27, he said: “I think that’s kind of what we implied in our forward guidance.” 

However, Mr. Remolona warned against potential market disruption from outsized adjustments.

“We can always have an off-cycle meeting. We can do (a) 50 bps (rate increase) if necessary,” Mr. Remolona said. “The problem with big moves is it tends to disturb the markets if you reverse them, so it’s better to do small moves in the same direction than a big move up and then a big move down — that’s more disruptive to markets.”

Jun Hao Ng, an assistant economist at Oxford Economics, said a third straight 25-bp hike may come at the BSP’s policy review in August as he echoed the central bank’s view on broadening inflation spillover effects.

“The move extends the tightening cycle that began in April and reflects growing concern over second-round effects and rising inflation expectations,” he said in a commentary. “While the BSP continues to favor gradual policy adjustments, this appears to reflect a preference for calibrating the pace of tightening rather than any shift in its inflation-fighting stance.”

Mr. Ng, however, sees inflation averaging 6% this year, slower than their 6.5% earlier estimate, citing easing fuel prices and the US-Iran peace deal.

“All in, today’s hike represents a continued response to mounting price pressures and (we) expect another 25-bp hike in August,” he said.

Metropolitan Bank and Trust Co. Chief Economist Nicholas Antonio T. Mapa likewise expects another quarter-point increase at the next meeting given the elevated inflation trajectory.

“Still elevated inflation projections suggest BSP will likely be open to additional tightening at the next meeting as (Mr.) Remolona balances out anchoring inflation expectations and supporting growth momentum,” he said in a Viber message.

For Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco, the BSP’s latest hike will likely be the last considering the country’s tepid growth.

“Our base case is that today’s rate increase will be the BSP’s last, with the worst part of the inflation shock in the rear-view mirror and with GDP growth still extremely subdued; this’ll likely be confirmed by the Q2 GDP print in August before the next Board meeting,” he said in an e-mailed note.

The central bank has three regular policy meetings left this year on Aug. 27, Oct. 22 and Dec. 17.