By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) tightened for a third straight meeting on Thursday, leaving the door open for further hikes amid looming inflationary pressures and solid medium-term growth prospects.
The Monetary Board raised the target reverse repurchase rate by 25 basis points (bps) to 5%, the highest in over a year or since the 5.25% in June 2025. This also matched the benchmark rate set in August 2025.
Rates on the overnight deposit and lending facilities were also lifted by 25 bps each to 4.5% and 5.5%, respectively.
This decision was in line with market consensus, as 19 of the 24 analysts polled by BusinessWorld penciled in another hike.
The BSP noted that underlying inflation risks from volatile oil prices, the looming “Super El Niño,” and a potential wage hike warranted additional preemptive monetary policy tightening.
“The measured increases in the policy rate will continue to anchor inflation expectations and mitigate the risk of further second-round effects,” the central bank said in a statement.
“Despite slow growth in the first half of 2026, the fundamentals for growth appear to be intact over the medium term. With the support of fiscal measures, growth is expected to strengthen in the second half of the year.”
Thursday saw a third consecutive 25-bp hike by the BSP, following the two separate rate hikes in April and June. This brought the BSP’s total increases to 75 bps since it began its series of monetary policy tightening in April amid inflationary pressures from the Middle East war-driven energy shock.
BSP Governor Eli M. Remolona, Jr. said on Thursday they hope they wouldn’t have to hike anew in the coming meetings but remain open to tightening to ensure inflation returns near the 3% target.
“We will tighten as much as we need to bring the inflation rate down to its target,” he said during a briefing.
The BSP now projects headline inflation to settle at 6.1% this year, slower than its earlier estimate of 6.4%.
According to BSP Department of Economic Research Director Lara Romina E. Ganapin, the headline print will likely peak in the fourth quarter of this year before easing back to the tolerance range by the fourth quarter of 2027.
However, the BSP raised its inflation forecast for 2027 to 5.4% from 4.5%, amid a potential wage hike and a looming “Super El Niño.”
The Philippine Atmospheric, Geophysical and Astronomical Services Administration said the country may encounter a “strong” El Niño season from September to November, which could intensify into a “very strong” one between October and January next year.
Ms. Ganapin noted that the El Niño-driven inflation could manifest from lower rice output and higher import prices.
The “Super El Niño” event is projected to slash agricultural output by 20%-30%, according to the Department of Agriculture, as high temperatures take a toll on local crops, livestock, fisheries and aquaculture.
“Today’s rate hike is a preemptive move because of the risks that we anticipate, including the risk of an El Niño event on food prices and the risk of further minimum wage increases,” Mr. Remolona said.
While volatile global oil prices remain a key inflation risk, the BSP chief said concerns over El Niño and wage hikes now carry a heavier weight in their inflation outlook.
The dual tranche P85 minimum wage hike in Metro Manila was suspended after a Pasig City Regional Trial Court issued a 20-day temporary restraining order on its implementation. The first tranche or P60 was imposed on July 25, while the second tranche or P25 was set to take effect on Jan. 20 next year.
For 2028, the BSP sees inflation returning near its target at 3.3%, although faster than its earlier estimate of 3.1%.
GROWTH
The central bank’s hawkish stance also came on the back of its expectations that domestic growth will rebound by the fourth quarter, with a full recovery underway next year.
“We expect that growth will recover by the fourth quarter of 2026,” Mr. Remolona said. “The fundamentals for growth are still in place. Once growth gets going, we will get going. We think growth will more or less fully recover by next year.”
The Philippine economy grew at a post-pandemic low of 2.3% in the second quarter, bringing first-half growth to 2.6%. It took a major hit from the lingering effects of the flood control mess on investments and public construction. Household spending, the economy’s largest driver, also weakened further as the Middle East war shocks stoked domestic prices.
However, Mr. Remolona said they could hit pause once they are “confident that the inflation rate will move towards the target of 3%.”
Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, said the BSP’s third straight interest rate increase was “more of a risk-management move.”
“Today’s 5% rate is defensible, but it could be regarded as the upper end of what the BSP should do under the current circumstances,” he said via Facebook.
For Mr. Peña-Reyes, who penciled a pause for the August meeting, the central bank could stand pat for the rest of the year if inflation expectations stabilize, and the energy shock weakens.
However, monetary authorities should closely watch core inflation, the movement of peso and oil prices, as well as the broader domestic growth in deciding the next policy moves, he added.
“Moreover, the growth side deserves increasing attention,” Mr. Peña-Reyes said. “With GDP already growing only 2.3% in Q2, the cost of another aggressive tightening cycle could become greater than the marginal inflation benefit.”
Meanwhile, Metropolitan Bank & Trust Co. Chief Economist Nicholas Antonio T. Mapa sees the central bank maintaining its measured tightening approach to prevent further dampening growth.
“BSP pushed back on overzealous aggressive rate hikes so (it) looks like they’ll stick to measures tightening,” he said in a Viber message. “Continued tightening will cap growth momentum further which is why BSP opted to tighten but refrain from deploying a more punchy 50-bp increase.”
On the other hand, ANZ Research said the BSP may hold to “wait-and-see” in October, before tightening anew in December as El Niño-driven inflation risks emerge.
“As inflation has moderated in (the) last two months, we expect the BSP will likely adopt a wait-and-see approach in the next policy meeting in October,” ANZ Foreign Exchange Analyst Kausani Basak and Chief Economist for Southeast Asia and India Sanjay Mathur said.
“However, the real policy rate remains in the accommodative zone, providing the BSP with adequate policy space for further rate hikes in case of upside risk to inflation. We expect the BSP to implement a hike in December in response to El Niño related price rises taking the policy rate to 5.25% by yearend,” they added.
The Monetary Board will hold its last two rate-setting meetings this year on Oct. 22 and Dec. 17.