BSP’s inflation fight dims rate cut hopes
Interest rate cuts may be pushed further into the future after the Bangko Sentral ng Pilipinas (BSP) signaled it was prepared to raise rate further to choke off rapid inflation, economists said, suggesting that price stability would take precedence over economic growth.
In a note to clients, economists at China Banking Corp. said monetary easing may not begin until late 2027 or even early 2028 if the BSP’s inflation outlook proves accurate.
While the case for further tightening will depend on incoming inflation and growth data, Chinabank said the central bank’s elevated inflation projections make another rate hike by December increasingly likely.
“While the BSP previously characterized its rate hike as pre-emptive, its latest assessment suggests growing concern over persistent inflation risks and the possibility of falling behind the curve,” the bank said.
Last week, a “strong majority” of the BSP’s Monetary Board decided to raise the policy rate by half a percentage point to 5.5 percent, citing the need for a stronger response to stubbornly high inflation. The move surprised markets, with only two of the 20 economists polled by the Inquirer having anticipated an increase of that size.
High inflation
The BSP expects inflation to average 6.1 percent this year, considerably above its 3-percent target. It further raised its inflation forecast for 2027 to 6 percent from 5.4 percent, though it expects price growth to ease to 3.3 percent in 2028.
BSP Gov. Eli Remolona Jr. said policymakers were concerned about elevated oil prices, the risk of sharp wage increases and potential food supply disruptions stemming from the ongoing El Niño episode. A weakening peso was another concern, he said, as a sharp depreciation could add to inflationary pressures.
Remolona said growth could recover by the first quarter of 2027. The Philippine economy expanded by just 2.6 percent in the first half of this year, weighed down by a major corruption scandal and a war-driven surge in prices.
Jun Hao Ng, assistant economist at Oxford Economics, said he expects the BSP to prioritize containing inflation despite the weak growth. “We therefore forecast another 25-basis point hike at the BSP’s December meeting, followed by a hold through 2027,” he said.
Citi prediction
Economists at Citi, meanwhile, said they did not expect rate hikes to extend beyond February 2027 for now. They projected that the BSP could begin easing monetary policy in late 2027 or early 2028, when monthly inflation returns to its target range.
“Inflation probably will have peaked into April,” they said. “And even though some El-Nino food inflation might persist into second quarter, it contains less risk of broadening versus energy inflation.”
Economists at Nomura Global Markets Research, however, flagged the possibility of another half-percentage-point increase in December, warning that inflation could climb to around 7 percent over the next two months. They expect the BSP to opt for a smaller quarter-point increase in February as global crude prices ease.
“Still, we acknowledge relatively high uncertainty surrounding our forecasts, and see the balance of risk as remaining tilted to the upside owing to the potential for a strong El Niño in the next few months, which could combine with elevated energy prices if the war in Iran continues,” they said.
