BSP hikes policy rate by 25 bps to 4.75%

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) extended its tightening cycle on Thursday after hiking the benchmark interest rate by another quarter point, saying inflationary pressures amid the oil crisis remain strong.

The Monetary Board, the BSP’s top policymaking body, lifted the policy rate guiding bank lending costs to 4.75 percent.

This is the BSP’s second rate hike this year, matching the expectations of all 15 economists polled by the Inquirer last week.

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Of the 15, 12 of the economists correctly predicted the quarter-point hike.

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“Inflationary pressures remain strong. Global oil and fertilizer prices remain elevated and continue to drive domestic fuel and food prices. Rising core inflation indicates broadening price pressures and second-round effects, including higher inflation expectations,” the BSP said in a statement.

Policymakers also raised their inflation forecasts, with 2026 inflation now expected to average 6.4 percent from the previous forecast of 6.3 percent.

For 2027, the forecast was raised to 4.5 percent from 4.3 percent.

The BSP likewise provided its inflation projection for 2028 for the first time, with inflation seen averaging 3.1 percent, comfortably within the central bank’s target range.

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This now indicates that it will take at least two years for average inflation to move back within the tolerance range of 2 to 4 percent.

Looming uncertainty

As it is, inflation had already eased to 6.8 percent in May from 7.2 percent in April but remained among the highest levels in three years and breached the central bank’s ceiling for the third consecutive month.

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Notably, the tentative peace deal between the United States and Iran, which would end more than three months of war and reopen the Strait of Hormuz, is seen to bring down global oil prices.

Analysts earlier said the Philippines stands to be one of Asia’s biggest winners from the deal, with lower fuel costs expected to accelerate the country’s inflation slowdown.

But BSP Gov. Eli Remolona said he remains wary, with uncertainty still looming.

“Even if the Strait of Hormuz is open, we will still need several months to rebuild infrastructure before we can expect the price of oil to return to the levels before the war,” Remolona said in a press conference.

Remolona also did not dismiss the possibility of extending the tightening cycle for the rest of the year.

“Central banks around the world have found this whole thing challenging. In our case, we’re one of the hardest hit. It’s especially challenging for us,” he said.

Any moves, whether small or a jumbo half-point hike, will still depend on lingering geopolitical uncertainties.

“We want baby steps. So, if something unexpected happens, we can always adjust. We can always have an off-cycle move. The problem with big moves is that they tend to disturb the market if we reverse them. It’s better to do small moves,” he said.

Any jumbo move, Remolona said, will depend on how extensive second-round effects become.

Mixed expectations

In a note, London-based Capital Economics said the BSP is likely to deliver at least one more

quarter-point hike, bringing the policy rate to 5 percent in August.

“Beyond that, much will depend on the incoming inflation data and moves in the peso. If these prove more favorable, concerns about the weak economy may prompt the BSP to move to the sidelines,” Jason Tuvey, economist at Capital Economics, said.

On the contrary, Pantheon Macroeconomics said Thursday’s hike could possibly be the last.

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“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,” Miguel Chanco, economist at Pantheon, said. INQ