Poll: BSP poised for 25-bp rate hike

By Katherine K. Chan, Reporter

STILL ELEVATED INFLATION and the peso’s persistent weakness may prompt the Bangko Sentral ng Pilipinas (BSP) to tighten for a second straight meeting to stay ahead of the curve and keep inflation expectations anchored, analysts said.   

A BusinessWorld poll conducted last week showed 15 of 20 analysts expect the Monetary Board to raise the interest rate anew by 25 basis points (bps) to 4.75% at its June 18 meeting.

Meanwhile, four analysts anticipate a 50-bp rate hike, saying that broadening price pressures call for a more aggressive action. If realized, this would bring the benchmark rate to 5%.

Only one analyst, Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, sees the BSP standing pat this week, citing geopolitical uncertainties.

Most analysts said the central bank is better positioned to deliver a “measured” 25-bp hike this week after headline inflation eased last month and with still sluggish domestic growth.

If realized, this would bring the key rate to 4.75% from the current 4.5%, the highest in nearly a year or since the 5% in August last year. It would likewise match the benchmark rate set in October 2025.

“While the latest inflation reading was softer than expected, this only subverted the risks of an off-cycle hike, but it has not paused the fundamentally hawkish policy stance,” University of Asia and the Pacific economist Marco Antonio C. Agonia told BusinessWorld in an e-mail.

“BSP may also be considering the softer growth horizon for this year, limiting any outsized rate hike movements for this coming meeting,” he added.

Maybank Investment Bank economist Azril Rosli noted that the BSP is likely to maintain a hawkish stance as May’s faster core inflation signals persistent price pressures, though the easing headline inflation will keep it from acting aggressively.

“Given the BSP’s preference to assess incoming data and the lagged effects of monetary policy, we believe the Monetary Board is likely to raise rates at a gradual pace, taking into account the latest inflation readings, which showed a slight moderation rather than warranting a more aggressive policy response,” he said in an e-mail.

Lower transport costs amid easing global oil prices led headline inflation to undershoot market expectations in May, settling at 6.8% from 7.2% in April. This was slower than the 7.9% median forecast in a BusinessWorld poll of 16 economists.

However, core inflation, which discounts volatile food and energy prices, breached the BSP’s 2%-4% target for the first time in over two years as it quickened to 4.1% in May from 3.9% a month ago.

Earlier this month, the central bank told Reuters that it may consider taking stronger measures to steer inflation back to its 3% target if elevated inflation expectations become entrenched.

This came after BSP Governor Eli M. Remolona, Jr. earlier hinted at an off-cycle hike before their scheduled June review prior to learning that the latest inflation print settled below their 7.1%-7.9% estimate.

The Monetary Board last tightened its monetary policy in April, delivering its first 25-bp hike in two-and-a-half years in a preemptive move to temper inflationary pressures and ensure inflation expectations remain anchored.

Central bank officials said then that it raised the key policy rate as it saw rising energy costs from the global oil supply shock start to spill over to other major commodities such as food and fertilizer.

After the Middle East conflict broke out in late February, local fuel prices soared to over P100 per liter from P50 to P60 per liter before the war.

As of end-May, a liter of gasoline was sold for P72.40 to P109.50, while diesel cost P76.40 to P98.50 per liter, and kerosene at P110.90 to P140 per liter.

Although local fuel retailers have imposed several rollbacks since mid-April, pump prices rose last week.

For Kausani Basak, an economist at ANZ Research, this means inflation will continue to overshoot the BSP’s target, which would justify another round of tightening on Thursday.

“We expect inflation to remain above the BSP’s 2-4% target range for the rest of the year as oil price pressures persist and (the) Middle East conflict remains unresolved,” she said in a report. “Second-round effects on prices will likely become increasingly pronounced in the coming months as producers pass on the higher cost of production to end consumers.”

LARGER HIKE?
Meanwhile, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the BSP may need a larger 50-bp rate hike to anchor inflation expectations as price pressures continue to take shape.

“Second-round effects, such as services inflation picking up, have yet to fully materialize and could lead to broader price increases once passed on to consumers,” he said via Viber.

“Beyond oil price movements, the potential impact of El Niño is a key factor, as it could disrupt agricultural production and push food prices higher. External factors remain important as well, with the BSP needing to prevent excessive currency volatility amid the wide gap between inflation and the policy rate,” Mr. Neri added.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., likewise sees the BSP opting for a 50-bp increase, especially considering inflation sits well above the BSP’s tolerance range.

This also comes as he projects consumer prices to remain elevated, with full-year inflation averaging 6%-7%, amid the El Niño season.

The BSP last delivered a 50-bp hike in February 2023 during a tightening cycle triggered by an oil shock after Russia’s invasion of Ukraine in early 2022. At the time, inflation stood at 8.6%.

If the BSP lifts the policy rate by 50 bps this week, key borrowing costs would reach its highest level in a year or since the 5.25% in June 2025.

POLICY PATH AHEAD
Analysts noted that while the current inflation trend may justify usual policy tightening, the country’s tepid economic growth complicates the BSP’s policy path.

“Weak domestic demand constrains the BSP’s policy space,” Chinabank Research said in a note. “Hence, we think that the BSP has limited room to tighten monetary policy. This policy cycle will be focused on ensuring that inflation expectations will remain anchored more than crimping domestic demand further.”

In the first quarter, Philippine gross domestic product growth eased to a new post-pandemic low of 2.8% as oil shocks added to the lingering effects of last year’s flood control mess. This was weaker than the 3% expansion in the fourth quarter and 5.4% seen a year earlier.

Metropolitan Bank and Trust Co. Chief Economist Nicholas Antonio T. Mapa said the BSP will “tread lightly” in upcoming policy decisions to avoid further harming the country’s fragile economy.

“BSP will err on the side of caution in the coming months, ensuring that it avoids throwing growth momentum out with the bath water,” he said in a Viber message.

“BSP aims to keep inflation within target in so far as it provides a conducive environment for sustainable growth. Thus, BSP will not lose sight of its overarching goal to provide price stability but only in so far as it helps deliver sustainable growth,” he added.

For Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion, the central bank could end its tightening cycle if both headline and core inflation continue to ease.

However, the BSP will have space for further rate hikes if inflation accelerates anew, inflation expectations rise, or external pressures from oil prices and foreign exchange volatility worsen, he added.

“We see scope for additional tightening beyond the June meeting, likely in the form of incremental 25-bp adjustments, depending on how inflation evolves,” he said in an e-mail.

Meanwhile, BPI’s Mr. Neri said inflationary pressures from a weak peso could likewise warrant more rounds of tightening by the BSP. 

“The peso remains under pressure, having breached P60/USD in March and recently trading near P61.30/USD. Further depreciation could amplify imported inflation, making the exchange rate an increasingly important policy consideration,” it said.

The peso fell to the P61-per-dollar range from the P58 level before the Middle East war erupted.

In May, it averaged P61.441 against the dollar, about 1.91% or P1.1497 weaker than the P60.2913 logged in April, according to central bank data.

However, it gained 4.5 centavos to close at P61.35 versus the greenback on Thursday from its P61.395 finish on Wednesday, marking its strongest finish in nearly a month.

The central bank has said that its foreign exchange market intervention is limited to tempering sharp movements that could stoke inflation, but it does not maintain a specific exchange rate level.

The BSP expects headline inflation to remain above 5% throughout the year to average 6.3% in 2026, before cooling to 4.3% in 2027.

After June 18, the Monetary Board is set to hold three more rate-setting meetings this year on Aug. 27, Oct. 22 and Dec. 17.