Economist sees 25-bps rate hike amid supply-side risks

CEBU, Philippines — The Bangko Sentral ng Pilipinas (BSP)  is likely to raise its benchmark interest rate by 25 basis points as mounting supply-side risks threaten to keep inflation elevated, according to BPI Lead Economist Emilio S. Neri Jr.

Neri said inflation risks are broadening beyond food, with weather disruptions, energy-price volatility, rising labor costs and a weaker peso creating pressure on the central bank to tighten policy despite a recent moderation in headline inflation.

“We expect the BSP to deliver a 25bp rate hike,” Neri said, adding that inflation risks remain tilted to the upside.

Near-term pressures are concentrated in food and energy, with monsoon rains and flooding posing renewed risks to agricultural production just as food supply conditions were beginning to stabilize.

Higher domestic fertilizer prices could add to farm input costs as the planting season approaches, while the potential emergence of a Super El Niño later this year could further disrupt agricultural supply and keep food prices elevated into 2027, Neri said.

Oil prices remain another source of uncertainty as geopolitical tensions between the US and Iran shift between signs of de-escalation and renewed confrontation. Rising producer prices in China could also add to imported cost pressures.

The recently approved wage increase in the National Capital Region could provide another source of inflationary pressure once implemented, particularly for labor-intensive services. Neri warned that higher wages could generate second-round effects if businesses pass increased labor costs on to consumers.

Taken together, these factors raise the risk that inflation could remain above the BSP’s target range through 2027, he said.

Peso adds to pressure

Currency weakness could further complicate the central bank’s inflation outlook.

Neri expects the peso to remain under pressure amid an uncertain external environment, with a sharper depreciation potentially amplifying imported inflation and forcing the BSP to maintain tighter monetary conditions even when the underlying shocks are largely supply-driven.

The Philippines’ gross international reserves fell to $103 billion in July from $113 billion at the onset of the US-Iran conflict, according to Neri.

While reserves remain adequate by traditional measures, the decline signals a gradual erosion of the country’s external buffers. Without a rate increase, faster depletion of reserves through foreign-exchange intervention could put additional pressure on the peso and inflation expectations, he said.

Credibility over growth

Neri said the BSP’s policy stance is likely to prioritize inflation credibility over near-term economic growth.

Governor Eli Remolona Jr.’s view that the central bank’s job is “to be credible, not popular” captures the institutional approach likely to shape the Monetary Board’s decision, he said.

Monetary policy can influence cyclical demand but has limited ability to resolve constraints on potential output, making rate cuts an ineffective response to predominantly supply-driven inflation pressures.

A pause aimed at supporting growth could instead risk allowing inflation expectations to become less anchored without resolving the underlying supply constraints, Neri said.

He also pointed to structural and governance challenges as increasingly important constraints on Philippine growth—areas that monetary policy cannot directly address.

A more durable response would require reforms in infrastructure execution, agricultural productivity and energy security, alongside faster government spending and efforts to remove supply bottlenecks.

A 25-basis-point increase would therefore signal that the Monetary Board is prioritizing price stability while leaving the responsibility for addressing structural constraints to fiscal and other government policies, Neri said.