THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to raise interest rates for the first time in more than two years as inflation risks mount amid tensions in the Middle East, according to a slight majority of analysts in a poll.
A BusinessWorld poll conducted last week showed that 11 out of 19 analysts expect the Monetary Board to hike the target reverse repurchase rate by 25 basis points (bps) at its policy meeting on April 23.
If realized, this would bring the benchmark rate to 4.5% from the current 4.25%, marking the BSP’s first tightening move in over two years or since October 2023.
On the other hand, eight analysts said the BSP will likely hold its key rate steady, citing supply-driven inflation risks and weaker growth prospects.
Since starting its easing cycle in August 2024, the central bank has slashed the benchmark policy rate by a total of 225 bps to an over three-year low of 4.25%. It also kept borrowing costs steady in an off-cycle meeting last month to calm markets amid growing uncertainties stemming from the war.
Most analysts said the Monetary Board will likely raise rates on Thursday as a preemptive move to anchor inflation expectations, with inflation seen breaching the 2-4% target if energy prices remain elevated.
“A 25-bp hike would allow the BSP to reaffirm its commitment to price stability, even as it keeps a calibrated and data-dependent stance going forward,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, said.
Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa said in a Viber message that monetary tightening will help “corral inflation expectations that may be fraying due to surging energy costs and subsequent pickup in prices due to second-order effects.”
BSP Governor Eli M. Remolona, Jr. last week told BusinessWorld that they have room to raise rates to temper rising inflation amid the Middle East conflict as they expect government spending to support growth.
Mr. Remolona noted that second-round effects may emerge sooner than expected as the global oil price shock is expected to spill over into domestic food and transport costs.
In March, elevated oil prices due to the war drove inflation to a near two-year high of 4.1%, faster than the BSP’s 3.1%-3.9% forecast and 2%-4% target for the year.
“While current pressures remain largely supply-driven, historical experience suggests prolonged shocks tend to spill over into demand-side dynamics, increasing the risk of de-anchored inflation expectations,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a report.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort noted in a Viber message the BSP had raised borrowing costs in 2022 when Russia’s invasion of Ukraine led to global crude oil prices breaching $100-per-barrel levels.
“There is a possibility of BSP rate hike, similar to the previous cycle four years ago in an effort to curb inflationary pressures at the bud and better manage inflation and prevent it from spiraling further, in an effort to bring back inflation to the inflation target range of 2%-4%, even if the unintended consequences include slowing down the economy,” Mr. Ricafort said.
Marco Antonio C. Agonia, an economist and analyst at the University of Asia and the Pacific (UA&P), said in an e-mail that the move on Thursday will be a one-off hike, with the BSP standing pat for the rest of the year.
“Given the softer growth outlook, further rate hikes may be too damaging for economic performance,” Mr. Agonia said.
Mr. Agonia noted a rate hike will also provide peso relief without using too many reserves.
Since the US and Israel began attacks on Iran on Feb. 28, the peso has weakened to breach the P60-per-dollar level, hitting a record low of P60.748 on March 31.
“The peso will likely remain under pressure as the situation in the Middle East remains fluid. A sharper depreciation would amplify imported inflation. This foreign exchange-inflation feedback loop may ultimately become a binding constraint, and may require tighter policy even in the face of a supply-driven shock,” Mr. Neri said.
HOLD?
Meanwhile, eight analysts expect the BSP to hold rates on Thursday, as monetary tightening cannot do much in addressing supply shocks.
Philippine National Bank economist Alvin Joseph A. Arogo said in an e-mail that the BSP should keep the policy rate at 4.25% on April 23 since raising financing costs seems at odds with the earlier move to provide loan relief amid current output constraints.
“Monetary tightening this soon could seriously put at risk prospects for growth recovery without doing much dent on inflation,” he said.
In a report, DBS said the BSP will likely keep rates unchanged amid slowing growth.
“The Philippines faces a potential stagflationary shock this year, with growth witnessing a weak handover from last year, while inflation comes off a low base, and peso remains under pressure,” DBS said.
China Banking Corp. (Chinabank) in a note said the BSP is likely to adopt a “prudent wait-and-see approach” due to heightened global uncertainty.
“Domestically, inflationary pressures continue to be driven largely by volatile supply-side factors, while demand conditions are showing signs of softening, reducing the case for immediate monetary tightening,” Chinabank said.
ING said the weaker growth outlook will prompt the BSP to hold rates but expects Thursday’s decision to “likely be close.”
“The Philippines remains one of the most oil-exposed economies in the region, prompting us to downgrade our 2026 GDP (gross domestic product) growth forecast to 4.5%. Against this weaker growth backdrop — and assuming the current geopolitical escalation eases in the near term — our base case is for the central bank to remain on hold in April,” ING said.
HAWKISH BSP
Meanwhile, Chinabank said concerns over the de-anchoring of inflation expectations are likely to keep the BSP hawkish.
“The Philippines is in the hawkish camp, leaving the door open to modest tightening moves this year if price risks prevail, as retail fuel prices are prone to swings in tune with global prices,” DBS said.
Standard Chartered Bank Asia Economist and FX Analyst Jonathan Koh said in a report that while they do not expect a rate hike this month, the BSP could raise borrowing costs at its June 18 meeting.
“Inflation passthrough is likely to pick up in coming months, driven by faster fiscal spending, possible transport fare hikes, higher rice and food prices, and Philippine peso-driven imported inflation, which could eventually prompt a one-off rate hike to safeguard price stability,” Mr. Koh said.
On the other hand, Patrick M. Ella, an economist at Sun Life Investment Management and Trust Corp., said the central bank could even reverse its expected rate hike this week by the second half of the year if the Middle East conflict is resolved soon. — Aaron Michael C. Sy
