By Katherine K. Chan, Reporter
A “DECISIVELY HAWKISH” Bangko Sentral ng Pilipinas (BSP) is expected to deliver further monetary tightening to contain inflation, after September’s hotter-than-expected price growth heightened concerns over looming upside risks, Japanese financial giant Nomura said.
In an e-mailed note, Nomura said the central bank expressed concern over the September inflation reading, which accelerated back to this year’s peak of 7.2% amid renewed price shocks from food, fuel, and utilities.
“BSP was far more concerned after September’s sharp rise in headline inflation to 7.2% and core inflation to 4.7%, driven by higher energy, fertilizer, and food costs, with El Niño posing additional upside risks in the coming months,” Nomura research analysts Euben Paracuelles, Nabila Amani, Lattakit Lapudomkarn, and Yiru Chen said.
Nomura’s comments came after top policymakers of Southeast Asian central banks gathered at the Nomura Research Forum in Bangkok, Thailand last week.
According to Nomura, investors were curious about the BSP’s stand on the trade-off between inflation and growth as well as its foreign exchange policy.
It noted that the central bank leans more hawkish than its regional peers, with potentially more scope to tighten its monetary policy further.
The Nomura research analysts said they see the BSP delivering a fourth straight 25-basis-point (bp) rate hike on Thursday (Oct. 22), which would bring its total increases to 100 bps and the key policy rate to a one-and-a-half-year high of 5.25%.
“Our sense from the discussions was that BSP remains decisively hawkish, as inflation remains well above its 2-4% target and upside risks remain,” they said.
A BusinessWorld poll last week also showed that 20 of 22 analysts penciled in a 25-bp increase at the BSP’s Oct. 22 meeting, while the remaining two projected a larger 50-bp hike.
The BSP last raised its key policy rate in August with a third consecutive 25-bp hike to 5%, a move monetary authorities said sought to preemptively contain inflation risks from volatile global oil prices, the minimum wage increase, and the looming “Super El Niño.”
BSP Governor Eli M. Remolona, Jr. had said after their August meeting that they may keep raising their benchmark rate as needed to ease inflation near their 3% target.
September marked the seventh month in a row that the headline inflation was above the BSP’s target, driving the nine-month average clip to 5.4%.
For Nomura, emerging threats from the Super El Niño season could keep the BSP hawkish even after tightening this week.
“The tone of the policy statement and comments will likely remain hawkish, with inflation risks tilted to the upside due to the possibility of a strong El Niño in coming months,” it said. “The tone should remain hawkish, in our view, with BSP continuing to pledge vigilance and remain focused on containing these risks and anchoring inflation expectations.”
Mr. Remolona said earlier this month that El Niño is their top inflation risk, adding that they will consider both its “benign” and “bad” scenarios in their upcoming monetary policy decision.
The state weather bureau has said that a strong El Niño is active in the Tropical Pacific, which could intensify further until December and persist until the first half of 2027.
GROWTH OUTLOOK
Meanwhile, the BSP’s cumulative hikes so far prompted Nomura to render the central bank “slightly less restrictive.”
Its research analysts noted that the BSP could have had more wiggle room for additional hikes if domestic growth wasn’t as tepid as it is.
“We think BSP also sees its stance as slightly restrictive after it raised rates by 75 bps to contain inflation and prevent expectations from becoming unanchored, but tightening would have been more aggressive without the pronounced weakness in domestic demand, in our view,” they said.
Economic growth has been sluggish since the second half of 2025, falling to a new post-pandemic low growth of 2.3% in the second quarter of this year amid an investment slump and muted household spending.
Gross domestic product growth averaged 2.6% in the first half, still short of the National Government’s full-year target of 3.5%-4.5%.
According to Nomura, the BSP still expects the economy to underperform but with some recovery underway in the last quarter of the year.
“BSP still likely sees growth as below potential, largely reflecting a sharp contraction in government spending following the flood control corruption scandal, but it expects a recovery beginning in Q4 2026,” Nomura research analysts said.
Nomura noted that the central bank appeared to be “reasonably confident” that government spending will pick up after recent disbursements based on its monitoring of the Treasury Single Account.
The latest data showed public expenditures rose by 8.01% to P4.271 trillion as of end-August from P3.954 trillion a year earlier. This accounted for about 66.05% of the government’s P6.466-trillion full-year expenditure program.
Still, the BSP’s anticipated economic recovery raises the risk of additional hikes beyond the one expected this week, according to Nomura.
“We also continue to flag the risk of further hikes by BSP thereafter given upside inflation risks from El Niño and BSP seeing a turnaround in government spending as well as the potential for greater second-round effects in that environment,” it said.
On the other hand, Nomura said the BSP will likely cut its reserve requirement ratio (RRR) further to enhance its policy transmission.
“On the reserve requirement ratio, which is currently at 5%, we believe the BSP’s longer-term goal remains to reduce it further to improve policy transmission,” the bank said.
“But preserving policy credibility under its inflation-targeting framework, in our view, remains a top priority in the current environment. So, while RRR cuts is still a goal for BSP, such moves, from BSP’s perspective, must be consistent with the broader easing stance, and hence we think there is no urgency to act at this point,” it added.
The BSP last cut universal and commercial banks’ RRR by 200 bps to 5% in February 2025. Digital banks’ RRR was likewise reduced by 150 bps to 2.5%, while thrift banks’ RRR was lowered by 100 bps to 0%. The cuts took effect in the week of March 28.
In a separate report on Tuesday, German Deutsche Bank said it expects the BSP to lift its target reverse repurchase rate by another 25 bps on Thursday amid global oil price spikes and heightened second-round effects.
“The current policy stance may not be sufficiently restrictive to effectively anchor inflation expectations,” it noted.
“While the previous meeting highlighted concerns about growth due to tighter monetary conditions, these are, in our view, secondary to the central bank’s primary mandate of price stability and low, stable inflation,” it added.
After this week’s meeting, the Monetary Board will hold its last policy review this year on Dec. 17.