Heads up: More BSP rate hikes on the way

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to raise interest rates further in December, with some economists anticipating additional tightening through early 2027 as persistent inflation and a weakening peso keep pressure on monetary authorities. Analysts from BofA Global Research, BMI and Bank of the Philippine Islands (BPI) see room for further increases after the BSP’s Monetary Board delivered a larger-than-expected 50-basis-point hike on Thursday, bringing the benchmark interest rate to 5.50 percent.

The policy rate serves as the central bank’s main tool for influencing borrowing costs and controlling inflation. Higher rates make loans more expensive, helping temper consumer spending and business investment to ease price pressures over time.

BofA Global Research expects the BSP to raise its policy rate by another 25 basis points in December and by a similar amount in February 2027, bringing the benchmark rate to six percent.

In a report, BofA said inflation could remain elevated at seven to eight percent through the first quarter of next year, requiring further monetary tightening. It expects inflation to average six percent this year before easing to 5.2 percent in 2027, still above the BSP’s two to four percent target range.

However, the bank sees room for the BSP to begin reversing some of its rate increases by the middle of next year if inflation shows signs of returning to target.

BMI, a Fitch Solutions company, likewise expects another 25-basis-point increase in December, which would lift the policy rate to 5.75 percent.

The research firm raised its year-end interest rate forecast from 5.50 percent after the BSP surprised financial markets with its largest rate hike since February 2023.

“Persistent inflationary pressures should keep the BSP on a tightening bias,” BMI said.

BMI expects inflation to average 5.9 percent this year and 5.4 percent in 2027. BMI said inflation would remain sufficiently elevated to warrant further tightening.

It also warned that continued peso weakness could add to inflation by making imported goods, particularly fuel and other dollar-priced products, more expensive.

The peso traded near record lows of 63.50 against the dollar on Thursday, according to BMI, which now expects the local currency to end 2026 at around 63 to $1, weaker than its previous forecast of 61.

BMI said another rate increase in December could help cushion currency pressures and limit their impact on domestic prices.

However, the research firm expects the BSP to hold rates steady for most of 2027 before reducing borrowing costs by a cumulative 50 basis points to 5.25 percent in the fourth quarter.

BPI lead economist Emilio Neri Jr. similarly expects additional monetary tightening, warning that the impact of El Niño could extend the BSP’s rate-hike cycle into the first half of next year.

“Despite the sizable adjustment, the tightening cycle is likely not over,” Neri said in a commentary.

The BPI economist said another increase of at least 25 basis points could come in December, while further tightening in the first quarter of 2027 remains possible depending on the severity of weather-related food price pressures.

While higher interest rates could weigh on economic activity, Neri said prolonged inflation may pose a greater threat to growth because household consumption accounts for around 70 percent of the Philippine economy.

He expects growth to improve in the second half of 2026 as government spending recovers, potentially giving the BSP more room to tighten monetary policy.

BMI, however, warned that the cumulative impact of higher interest rates could further constrain economic activity next year.

It forecasts economic growth of 4.5 percent in 2027, below the government’s five to six percent target, as elevated inflation strains household finances and higher borrowing costs discourage investment.