By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday delivered a surprise 50-basis-point (bp) rate hike and signaled it was prepared to continue tightening amid broadening inflation risks from persistent price shocks and a strong El Niño.
The Monetary Board raised the target reverse repurchase rate (RRP) by 50 bps to 5.5%, the highest in nearly two years or since the 5.75% in February 2025. This also matched the benchmark rate set in April 2025.
Rates on the overnight deposit and lending facilities were also hiked by 50 bps each to 5% and 6%, respectively.
“The Monetary Board recognized the need for a strong monetary policy response to broadening price pressures and further upside risks to inflation,” the BSP said in a statement on Thursday.
“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.”
This was the BSP’s first 50-bp hike in nearly four years or since February 2023.
“This decisive adjustment will appropriately tighten monetary conditions in order to contain spillover effects and firmly anchor inflation expectations,” BSP Governor Eli M. Remolona, Jr. said during a press briefing.
“Meanwhile, domestic economic activity is expected to recover, supported by fiscal measures. This provides some room for the policy adjustment that is needed for us to return to low inflation, the foundation of sustainable growth,” he added.
The BSP’s latest move marked the fourth consecutive meeting at which it tightened its monetary policy, bringing the cumulative hikes to 125 bps since April.
Only two out of 22 analysts polled by BusinessWorld predicted the 50-bp hike, while 20 had penciled in a quarter-point hike.
Mr. Remolona noted that the decision to raise by 50 bps was a “strong majority” in the Monetary Board, adding that it was driven by concerns that they were falling behind the curve.
“I think, clearly, we wouldn’t be doing 50 (bps) if we didn’t think we were kind of behind the curve. But fortunately, we only need 50 (bps) for now,” he said.
The BSP chief also noted that the Monetary Board talked about an off cycle hike, but opted out to avoid signaling to the market that the economic situation is too dire.
The central bank had noted inflation risks have intensified after the reignited Middle East war drove global oil prices higher, with the recent transport fare hikes and potential supply disruptions from El Niño adding pressures.
“The forecasts were worse than we thought. There was a bit of a sense of urgency to try and dampen these inflationary pressures,” Mr. Remolona said.
The BSP maintained its inflation forecast at 6.1% for this year but raised it to 6% for 2027 from 5.4% previously. It kept its inflation estimate at 3.3% for 2028.
“So, similar to headline inflation, the outlook now is that the core inflation may continue to increase over the next few months and even, perhaps, (in) the early months of 2027,” BSP Deputy Governor Zeno Ronald R. Abenoja said.
Inflation returned to this year’s peak of 7.2% in September amid renewed price surges in oil, food, housing, and utilities. This was the seventh consecutive month that inflation was above the BSP’s 3% target, with the year-to-date headline clip standing at 5.4%.
Core inflation, which discounts volatile food and fuel prices, likewise accelerated to a nearly three-year high of 4.7%.
Mr. Remolona noted that El Niño remains the top inflation risk, with Mr. Abenoja adding that the extreme weather event could affect rice production and push food prices higher.
“We think there’s a modest El Niño that we hope will happen. There is going to be El Niño. We’re almost sure of that… (But) ‘Godzilla El Niño,’ that El Niño will be pretty bad for prices,” Mr. Remolona said.
The Philippine Atmospheric, Geophysical and Astronomical Services Administration on Wednesday said that a strong to very strong El Niño is active in the Tropical Pacific. El Niño, it added, is expected to peak before the year ends and last until the first quarter of 2027.
Meanwhile, the central bank governor said they are concerned that the recent peso depreciation may be inflationary.
However, Mr. Remolona noted that they do not tighten to support the peso, with their foreign market intervention still limited to smoothening out sharp inflationary swings.
On Thursday, the peso fell by 15.9 centavos to a new all-time low of P63.52 versus the greenback, breaking the previous record finish of P63.361 logged on Wednesday.
FURTHER TIGHTENING
Mr. Remolona also said they expect the economy to recover by the first quarter of next year on the back of fiscal measures, which provides them with additional tightening space.
“We expect fiscal spending to rise. And then with that, sentiment will improve and investment will go up. And inflation, if inflation comes down, sentiment will also improve. Then that will help the recovery,” he said.
Mr. Remolona left the door open for further tightening, but said he hopes they wouldn’t have to deliver more outsized hikes.
“I would say we remain open to further interest rate hikes. I can’t say whether it will be 50 (bps) or 25 (bps) or bigger,” he said. “You might remember that in 2022 we did 75 and then 50, and 50. I hope we don’t need to do that.”
Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr., who correctly predicted a 50-bp hike for Thursday’s meeting, said the BSP’s latest move was appropriate, and expects further tightening.
“We see the possibility of another rate hike in December, potentially at least 25 basis points,” he said in a commentary. “Further tightening in the first quarter of 2027 remains possible depending on the inflationary impact of El Niño. Should weather disruptions prove more severe than expected, the tightening cycle could extend into the first half of next year.”
The Monetary Board will hold its last meeting this year on Dec. 17.
On the other hand, Capital Economics Deputy Chief Emerging Markets Economist Jason Tuvey sees lower odds of further tightening if oil prices ease.
“The BSP hiked interest rates today by a larger-than-expected 50 bps, to 5.5%, but so long as energy prices stabilize and drop back from early next year as we assume, further monetary tightening is unlikely,” he said in a commentary.
However, persistently high fuel costs and potentially faster food inflation may prompt the BSP to increase its key rate by up to twice more, Mr. Tuvey added.
“That said, if energy prices remain elevated into next year and El Niño adds further upward pressure to food inflation, the BSP is likely to keep rates high for longer than we currently anticipate or even deliver one or two more hikes,” he said.
Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco also noted that another quarter-point hike in December is “not a done deal,” adding that the BSP could start easing by mid next year.
“Our base case is that the Board will eventually find itself in a position to start unwinding this year’s hikes by the middle of 2027, especially if we’re right about GDP growth remaining below par for the foreseeable future,” he said in an e-mail. “The Board is flimsily hanging its hat on ‘fiscal measures’ to support a recovery in domestic activity, which we think is a tough ask, given the overbearing weight of weak consumption and investment.”
BMI Asia Country Risk Analyst Brandon Ong said he expects another 25-bp rate hike in December to bring the policy rate to 5.75%.
“But the risk of another hike as early as February is rising. What some forecasters are calling a Godzilla El Niño could cause unprecedented crop disruptions and keep food prices elevated for longer, just as energy costs stayed high in a prolonged US-Iran conflict,” he said in a webinar on Thursday.
“As one of the region’s most inflation sensitive banks, the BSP will not hesitate to hike beyond our base case if inflation expectations start to trip,” he added.
Mr. Ong said the BMI now expects the Philippine economy to grow by 4.5% in 2027, from its previous forecast of 4.9%, as higher inflation will weigh on household spending while more intense El Niño spillovers and tighter monetary policy may dampen activity.
“Higher energy prices are already battering the economy this year, and with the El Niño hit likely to land in 2027, that pressure will likely carry on until next year,” he said.
“One silver lining is that public investments should pick up in 2027 from a low base this year, helping the Philippines emerge as one of the region’s faster growing economies,” he added. — with Justine Irish D. Tabile