By Katherine K. Chan, Reporter
THE Bangko Sentral ng Pilipinas (BSP) may continue raising interest rates to curb inflation despite the risk of slowing economic growth in the near term, as economists said restoring price stability would support a more sustainable recovery.
Alain Jomarie G. Santos, chairman of the University of Santo Tomas Department of Economics, noted that higher interest rates could dampen economic activity, but heated inflation also weakens consumers’ purchasing power.
“To make it simple: higher interest rates are like taking bitter medicine now, so we don’t end up in the ICU (intensive care unit) later,” Mr. Santos told BusinessWorld via Facebook Messenger.
“Right now, high interest rates mean loans for cars, houses, and business growth are more expensive, so everyone spends a little less. That slows down our immediate economy. But high inflation is like a silent thief because it steals the value of your paycheck every time you buy groceries,” he added.
Last week, the Monetary Board hiked rates for a fourth straight meeting amid stubborn oil-driven price pressures and intensifying risks from a strong El Niño.
It raised its key policy rate by a larger-than-usual 50 basis points (bps) to a nearly two-year high of 5.5%, bringing its cumulative hikes to 125 bps since it first tightened in April.
This was the first 50-bp increase in nearly four years or since February 2023, when the central bank sought to prevent inflation from breaching its target.
Marites M. Tiongco, a professor at the De La Salle University Carlos L. Tiu School of Economics, noted that the BSP continues to face a dilemma as the economy confronts red-hot inflation and tepid growth.
“The BSP is facing a difficult but familiar central bank dilemma: inflation requires monetary restraint, while weak growth and investment argue against prolonged tightening,” she told BusinessWorld in a Viber message.
“The near-term costs could be significant because the economy is already experiencing weak capital formation. Nevertheless, allowing inflation expectations to become unanchored would create larger and more persistent risks to household welfare and investment,” she added.
The BSP now expects inflation to pick up to 6.1% this year and 6% next year after it noted that the economic situation turned out worse than they had thought.
Headline inflation came in at a three-and-a-half-year high of 7.2% in September as fuel, food, housing, and utility costs soared. It matched this year’s peak first seen in April and brought the year-to-date clip to 5.4%.
According to the BSP, the headline print may hit a new peak in the fourth quarter, with a hotter reading likely for the bottom 30% of income households.
Under its price stability mandate, the BSP raises its key rate to prevent inflation spillovers and keep inflation expectations anchored, particularly by tempering the second-order effects of price shocks on wage- and price-setting behavior.
For University of Asia and the Pacific Economist Marco Antonio C. Agonia, the BSP’s ongoing tightening cycle may slow economic activity over the next two years.
“While price stability does support a stable macro environment, rate hikes may keep investment formation subdued in the medium term,” he told BusinessWorld in an e-mail.
“Given the supply-dominant nature of this inflation episode and already slow growth, supply-side policies aimed at mitigating food and oil availability disruptions may be more effective at bringing inflation back to target and supporting long-run economic growth,” he added.
Leonardo A. Lanzona, Jr., an economics professor at the Ateneo de Manila University, also noted that elevated borrowing costs will strain credit, consumption, and investment.
“Higher-for-longer rates will weigh on credit, consumption, and investment, and that comes when growth is already soft,” he told BusinessWorld via Viber. “How large the drag turns out to be depends on whether government spending and investor confidence hold up.”
Philippine economic growth has remained sluggish since last year, with gross domestic product expanding by an average of just 2.6% in the first half amid disruptions from the flood control scandal and the economic fallout from the Middle East war.
BSP Governor Eli M. Remolona, Jr. said following their latest meeting that the economy could rebound by the first quarter of 2027, driven by fiscal measures and sentiment recovery, especially once inflation eases.
This gives them more room to continue their inflation-targeting hiking cycle, he added.
FUTURE PRICE STABILITY
Still, the BSP should keep reining in inflation even at the cost of near-term growth to protect consumers’ purchasing power and future price stability, according to economists.
“If the Bangko Sentral doesn’t slow things down today, prices will run wild, making basic goods unaffordable for ordinary families,” Mr. Santos said. “Taking a brief hit now keeps prices steady, protects what your money can actually buy, and gives businesses the confidence to hire and invest for the long run.”
Ms. Tiongco noted that uncertainty triggered by persistent inflation weighs on long-term investments, and controlling inflation would prevent the further weakening of consumption.
“Persistent inflation creates uncertainty about future production costs, wages, financing conditions, and consumer demand. This uncertainty discourages long-term investment,” she said. “Inflation also reduces the purchasing power of households, particularly poorer households that spend a larger proportion of their income on food, transport, and utilities.”
By restoring price stability, according to Ms. Tiongco, the BSP could help the economy become more sustainable in the long run.
“Restoring price stability can improve the predictability of economic decisions, protect real incomes, and eventually create conditions for more sustainable investment,” she added.
However, Mr. Lanzona said the BSP’s efforts alone will not be sufficient to revive the economy.
“But rate hikes alone cannot restore growth,” he said. “The result depends on whether the government fixes the real-sector bottlenecks in agriculture, infrastructure, and energy so supply can keep up with demand.”
Several economists have priced in additional hikes after the BSP’s latest meeting as inflation stays well-above target and supply-side pressures linger.
Mr. Agonia projects two more consecutive quarter-point increases at the December and February meetings to end the BSP’s tightening cycle with the benchmark rate at 6%.
On the other hand, Ms. Tiongco is expecting a final 25-bp hike in December, although noted that the BSP may opt for a larger move.
“I would not rule out an additional 50 basis points if inflation expectations deteriorate; the peso depreciates sharply, or higher energy and transport costs generate more persistent second-round effects,” she said.
Meanwhile, Deutsche Bank Research Economist Junjie Huang sees the BSP holding fire in December before tightening anew in February.
“We pencil in a further 25-bp rate hike in BSP’s February 2027 MB (Monetary Board) meeting, as we think the central bank may pause in December after delivering the outsized hike in October,” he said in a separate report.
“By the February 2027 meeting, BSP will have January 2027 inflation data in hand, allowing it to assess whether the anticipated pickup in price pressures is materializing and warrants additional tightening,” he added.
The Monetary Board will hold its last meeting this year on Dec. 17, with the first meeting of 2027 likely to be held in February.