BSP policy rates hiked by 25 bps

For 3rd straight time

MANILA, Philippines —  The Bangko Sentral ng Pilipinas (BSP) raised its key interest rate preemptively to five percent as emerging risks from El Niño and wage adjustments threaten to keep inflation above target through 2027.

The Monetary Board increased the target reverse repurchase rate by 25 basis points yesterday, marking its third consecutive hike since April and bringing the cumulative tightening this year to 75 basis points.

Interest rates on the overnight deposit and lending facilities were likewise adjusted to 4.5 percent and 5.5 percent, respectively.

BSP Governor Eli Remolona Jr. said that while headline inflation eased to 6.2 percent in July, underlying price pressures and the risk of second-round effects continue to warrant monetary action.

Oil prices remain volatile, while a severe El Niño  could push agricultural prices higher. Potential minimum wage adjustments could also influence businesses’ pricing decisions and further broaden inflationary pressures.

“These underlying price pressures require preemptive monetary action,” Remolona said. “The measured increases in BSP interest rates will continue to anchor inflation expectations of consumers and businesses and mitigate further broadening of inflationary pressures.”

The BSP lowered its average inflation forecast for 2026 to 6.1 percent from 6.4 percent previously, reflecting lower-than-expected inflation in June and July as well as declining oil prices.

For 2027, however, the BSP raised its inflation forecast sharply to 5.4 percent from 4.5 percent, citing the expected effects of a severe El Niño episode and higher minimum wages. Inflation is projected to ease to 3.3 percent in 2028.

Department of Economic Research director Lara Romina Ganapin said inflation would likely peak in the fourth quarter  before easing. Headline inflation is projected to return to the target range only by the fourth quarter of 2027.

Remolona said monetary policy normally works with a lag of about two years. Since the BSP began raising rates in April, the full impact of the current tightening cycle is expected to become more evident by 2028.

Despite the elevated inflation outlook, Remolona said the central bank hopes it will not need to raise rates again after Thursday’s preemptive move.

“We’re hoping that we won’t need another rate hike,” he said. “Given what we think the impact is likely to be, we may not need further policy rate increases.”

However, the BSP chief stressed the policy path would depend on how the emerging risks materialize.

“We will tighten as much as we need to, to bring the inflation rate to its target,” Remolona said.

Asked what would allow the Monetary Board to pause, he said it would do so “as soon as we’re confident that the inflation rate will move toward the target of three percent.”

The governor agreed that the next policy decision would hinge largely on the severity of El Niño and the extent of wage adjustments.

Ganapin said the weather phenomenon could raise rice prices through two channels. Domestic prices may increase if lower rice production tightens local supply, while import costs may rise as other rice-producing countries are also affected by El Niño.

The BSP’s alternative scenarios consider a more severe episode accompanied by strong typhoons, as well as possible changes in the export policies of rice-producing countries and shifts in domestic policy.

Minimum wage increases are also expected to exert greater pressure on prices next year because their impact normally emerges with a lag of about six months.

Meanwhile, Remolona acknowledged that economic growth was weak in the first half, which he attributed mainly to a “collapse in government investment” and infrastructure spending.

He expects growth to recover by the fourth quarter as the government accelerates infrastructure disbursements, with a more complete recovery anticipated next year.

Remolona maintained that monetary policy was not the primary constraint on the economy, saying keeping the policy rate unchanged would not have provided a significant boost to growth.

“We don’t really have the tools to boost growth in the short run at the expense of inflation,” he said.

The BSP said the country’s medium-term growth fundamentals remain intact, while fiscal measures are expected to support stronger economic activity in the second half.