THE Bangko Sentral ng Pilipinas (BSP) raised its target reverse repurchase (RRP) rate by 50 basis points to 5.50 percent on Thursday, Oct. 22. It was the fourth straight increase this year and signals that the central bank sees inflation as a bigger threat than a slowing economy.
The overnight deposit and lending facilities were adjusted to 5 percent and 6 percent, respectively. BSP Governor Eli Remolona Jr. said the Monetary Board acted decisively because it expects inflation to accelerate further, driven by oil prices, transport fares and the potential effect of El Niño on food prices.
According to the Monetary Board, inflation is expected to accelerate further in the coming months.
“Average headline inflation is expected to remain high in 2027 and approach our 3 percent target in 2028. Core inflation is likewise projected to continue to rise, indicating underlying price pressures,” the board said.
Headline inflation rose to 7.2 percent in September from 6.1 percent in August, exceeding the BSP’s 2 to 4 percent target. Core inflation climbed to a three-year high of 4.7 percent, suggesting price pressures are spreading beyond fuel and food.
The board cited renewed tensions in the Middle East, which have driven global oil prices higher. It said upside risks to inflation materialized with the recent increase in transportation fares. El Niño conditions also continue to pose a risk to agricultural production and prices.
The peso adds to the pressure
The currency has complicated matters. The peso closed at a record low of P63.361 per dollar on Oct. 20, making imported fuel, food and raw materials costlier. Remolona said the BSP does not defend the peso or track exchange rates in its forecasts. It intervenes in the foreign exchange market only to dampen large swings that could feed inflation.
What it means for business
For companies, the effects will come through several channels:
Financing costs: Firms with floating-rate or short-term debt will feel the higher rates first, and new borrowing for expansion becomes pricier.
Input costs: Importers and manufacturers that depend on foreign materials face a double hit from the weak peso and high global oil prices.
Demand: Higher rates and persistent price increases may further weigh on consumption and investment. Philippine GDP growth slowed to 2.3 percent in the second quarter.
Operating costs: Transport fares, electricity and wages are among the risks businesses are being warned about.
Limits of rate hikes
Analysts noted that much of the current inflation is supply-driven, including weather-related disruptions to food production, rising global oil prices and the El Niño threat. Monetary policy cannot directly fix any of these. The BSP’s aim is to contain second-round effects and keep inflation expectations anchored.
The 50-basis-point hike was widely expected, though it sits at the high end of forecasts. Former BSP deputy governor Diwa Guinigundo and economist Wilhelmina Manalac had called for a move of that size to keep inflation from becoming entrenched, while acknowledging the risks to an already struggling economy.
Meanwhile, domestic economic activity is expected to recover, supported by fiscal measures.
The Monetary Board said a strong monetary policy response was needed to address broadening price pressures and further upside risks to inflation.
The BSP stands ready to take further monetary policy action as necessary to ensure the timely return of inflation to the target, in keeping with our price stability mandate. / MVG