BSP may end tightening cycle after next hike – PNB

The Bangko Sentral ng Pilipinas (BSP) may end its monetary policy tightening cycle after its meeting next Thursday, 22 October, following another expected rate hike, as the central bank grapples with accelerating inflation and greater economic uncertainty stemming from the Middle East, according to Philippine National Bank (PNB) economist Alvin Arogo.

In a statement on Thursday, Arogo said PNB expects the BSP to raise interest rates by another 25 basis points at the Monetary Board’s meeting next week. The move could signal the end of the current hiking cycle as the focus shifts to next year.

"We expect the BSP to raise the Target RRP Rate by 25 bps to 5.25% at its next policy meeting,” he said.

“This could mark the end of the current tightening cycle as focus shifts to 2027 and our baseline forecast shows inflation returning below 4.0% by 3Q27.”

The BSP has raised rates three times since the onset of the Gulf conflict in March, increasing its target reverse repurchase rate by a combined 75 basis points over the past seven months as headline inflation climbed to three-year highs of 7.2 percent in both April and September.

Economists, including the BSP itself, have acknowledged that an expected severe El Niño event toward the end of the year poses the biggest upside risk to headline inflation. The central bank’s latest rate hike was partly driven by concerns over the dry season, for which the government has earmarked about P45 billion to help mitigate its effects.

“These days, the scenario that we care about the most is El Nino. There's a regular El Nino, a kind of benign El Nino, which is bad news. But there's a bad El Nino, which is really, really bad news. So we have to worry about both scenarios in deciding monetary policy based on that,” said BSP Governor Eli Remolona Jr.

Remolona has maintained a hawkish stance on inflation, which the BSP expects to exceed its 3 percent annual target over the next three years.

Arogo added that elevated oil prices amid continued tensions in the Middle East could prompt the central bank to raise rates again in December, underscoring the uncertainty surrounding the global economic outlook.

“While our baseline assumes geopolitical tensions ease around the November U.S. elections, a sustained increase in crude oil prices could still justify another 25 bps hike in December," he said.

The government recently suspended excise taxes on liquefied petroleum gas and kerosene for the remainder of the year. Elevated global oil prices also contributed to the peso breaching the P63-per-dollar level for the first time on Thursday.

Remolona acknowledged the trade-offs the BSP faces amid the broader economic downturn.

“It's far too easy for us to just please the crowd. The crowd seems to want low interest rates, strong peso, and low inflation,” he said.

“But we have to do the right thing for the economy. So we won't be able to make you guys happy all the time. And that's why we have independence.”