BSP hikes rates to 5% for third straight meeting on inflation

Bangko Sentral ng Pilipinas raised its benchmark overnight reverse repurchase rate to 5.00% from 4.75% Thursday, the third consecutive hike, as higher energy prices from the Middle East conflict push inflation well above the central bank's target range.

"Monthly inflation has exceeded six percent year-on-year in the last four prints, firmly above the bank's two to four percent target range," Sarah Tan, economist at Moody's Analytics, said ahead of the decision.

The BSP also raised its benchmark lending rate to 5.50% from 5.25%. The move was widely expected, with 10 of 11 economists polled by The Wall Street Journal forecasting the increase. The central bank has now raised its policy rate by 75 basis points since April, diverging from Bank Indonesia and Bank of Thailand, which left their rates unchanged.

The tightening comes as the Philippines confronts a growth-inflation tradeoff. Moody's Analytics cut its 2026 growth forecast to 3 percent from 4 percent, citing weaker domestic demand after second-quarter GDP expanded just 2.3 percent. Headline inflation eased to 6.2 percent in July from 6.4 percent in June but remains far above the BSP's target.

The Philippines is particularly exposed to the energy price shock because it relies heavily on imported fuel, making consumers and businesses vulnerable to higher oil and electricity costs. Inflation averaged 5 percent from January to July, and Moody's Analytics raised its 2026 inflation forecast to 5.2 percent from the 3.5 percent projected in April. The upward revision reflects inflation prints that have run considerably higher than expected, with spillover from energy into food and other consumer goods and services. Higher electricity costs feed directly into production costs across manufacturing, transport, and agriculture, creating broad-based price pressure that monetary policy must address.

The rate path has widened the gap between the BSP and some regional peers. Bank Indonesia and Bank of Thailand both held rates steady, while the BSP has now delivered 75 basis points of tightening since April. The divergence reflects the Philippines' outsized exposure to imported energy costs relative to its neighbors, which have been less affected by the Middle East conflict's impact on oil prices. The widening rate differential could support the Philippine peso, though the currency's trajectory will also depend on global risk appetite and the pace of U.S. Federal Reserve policy.

Growth Forecasts Slashed as Inflation Erodes Purchasing Power

Moody's Analytics now expects the Philippine economy to grow 3 percent this year, below the government's 3.5-4.5 percent target. Second-quarter GDP expanded 2.3 percent, slower than the 2.8 percent in the first quarter, bringing first-half growth to 2.6 percent. The lower forecast primarily incorporates the latest second-quarter data, which point to substantially weaker domestic demand than previously anticipated.

"We expect growth to remain subdued in the second half of the year," Tan said. She said weakness in consumption and private investment suggests domestic demand will remain a constraint through the rest of 2026, with elevated inflation weighing on household purchasing power and limiting the pace of recovery.

The research firm expects growth to improve to 4.6 percent in 2027 and 5.1 percent in 2028, supported by favorable base effects following this year's weak expansion and easing inflation that should allow domestic demand to recover gradually. Moody's Analytics projects inflation to fall to 3.5 percent in 2027 and 3.2 percent in 2028, assuming the current energy shock does not persist.

What Comes Next

The BSP faces a delicate balancing act. Further hikes could deepen the growth slowdown, while pausing risks entrenching inflation expectations. Tan warned that a more persistent inflation shock could further weaken the outlook, particularly if El Niño intensifies food price pressures. Continued weakness in private investment is another major downside risk, as businesses defer expansion plans in an environment of elevated borrowing costs and uncertain demand.

The Philippine Stock Exchange index slipped ahead of Thursday's decision, extending losses as investors positioned for the rate increase. The next BSP policy meeting will be closely watched for whether the central bank considers this tightening cycle complete, with the balance of risks still tilted toward inflation given the four consecutive monthly prints above 6 percent. If inflation shows signs of peaking in the coming months, the BSP could pause to assess the cumulative impact of its 75 basis points of tightening on an already slowing economy.

This article is for informational purposes only and does not constitute investment advice.