BSP holds rates in off-cycle meeting

The Bangko Sentral ng Pilipinas (BSP) kept its policy rate unchanged at 4.25% during a surprise off-cycle meeting on Thursday, as it sought to calm markets amid growing concerns over the impact of the Middle East war on the economy.

In a statement, the BSP said it left the target reverse repurchase rate unchanged at 4.25%.

“To raise the policy rate at this time would delay the recovery,” the BSP said.

This marks the Monetary Board’s first off-cycle move in over two years or since October 2023, when it raised the policy rate to 6.5%. The central bank was not scheduled to review policy until April 23.

BSP Governor Eli M. Remolona, Jr. said they decided to stand pat as their growth outlook remains clouded and as emerging inflationary risks prove supply-driven, “for which monetary policy has limited effectiveness.”

Mr. Remolona noted that the latest off-cycle policy action was an assurance for the market, which has grappled with uncertainties arising from the ongoing war in the Middle East.

“I hope it reassures markets that we are assessing the situation constantly,” he said.

“Normally, with inflation going where it’s going, we would have hiked. But because it was driven by supply shocks, we felt a hike wouldn’t do very much. And at the same time, because growth was relatively weak, growth would temper any rise in inflation,” he added.

Faster inflation seen

The BSP said its inflation expectations remain well-anchored but raised its forecast for 2026 to 5.1% from 3.6% previously. If realized, the headline print would breach its 2%-4% target.

BSP Deputy Governor Zeno Ronald R. Abenoja said this is based on projections that global crude oil prices will average around $85 per barrel (/bbl) by yearend and $76/bbl next year, citing futures prices.

The central bank also considered the second-round effects of oil prices, including possible uptick in transport fares, food and fertilizer prices, electricity rates and wages, as well as higher tariff rates and a potential fuel excise tax suspension.

According to Dennis D. Lapid, officer-in-charge of the BSP’s Monetary Policy Sub-Sector, inflation may hover around 3.5% in March before pushing past the BSP’s ceiling to around 5% in April.

As of February, inflation has averaged 2.2%.

However, Mr. Remolona said core inflation, which excludes volatile prices of food and fuel, will also rise but is unlikely to accelerate beyond 4%. This, he noted, is what the central bank prefers to assess their outlook amid current economic conditions.

For 2027, the BSP sees inflation averaging 3.8%, higher than its earlier estimate of 3.2%.

The BSP last held steady in February 2025, which was followed by sixth straight 25-basis-point cuts until its Feb. 19, 2026 meeting as its inflation outlook remained subdued at the time.

Mr. Remolona noted that current data showed they can do more to support growth right now than address supply-driven spikes in consumer prices.

However, he reaffirmed that the BSP remains committed to its price stability mandate.

Mr. Remolona also said the current growth environment still calls for support from fiscal policy to help the economy recover from the fallout from the corruption scandal, especially with the expected burden of energy shocks on domestic growth.

“Fiscal policy would be more effective at this stage,” the BSP chief said. “But it is, I think, unusual that inflation is now driven almost entirely by supply shocks for which monetary policy cannot do very much, but it can still do something about growth.”

The central bank trimmed its gross domestic product (GDP) growth estimate to 4.4% from 4.6% for this year but maintained its forecast for 2027 at 5.9%.

Mr. Abenoja said recovery may come by the second half of 2026 as spillovers from last year’s graft scandal and recent energy shocks could keep the growth momentum weak in the first half.

Tighter monetary policy

Looking ahead, Mr. Remolona said monetary policy decisions will focus on tempering potential second-round effects of the oil price shocks.

He noted that oil hitting $200 per barrel is an “extreme scenario but possible,” adding that the BSP would be forced to tighten if that materializes.

“It’s possible, of course,” he said. “But if that happens, we would be forced to raise our rates in a kind of catch-up mode. But for now, our scenario is not quite that extreme. So, we think we can still manage (to maintain) our policy.”

Mr. Remolona said the BSP is willing to tighten monetary policy if it can address demand-driven inflation stemming from the second-round effects of oil shocks.

“(O)nce we see second-round effects from those shocks, for which we can do something about the demand for those second-round effects, then I think it would be appropriate for monetary policy to tighten, address the inflation from those second-round effects,” he said.

Mr. Remolona also left the door open to holding more off-cycle policy meetings “as needed” if the economic crisis amid the United States-Israel war on Iran lasts longer.

The Monetary Board has five more regular policy meetings this year scheduled for April 23, June 18, Aug. 27, Oct. 22 and Dec. 17.

Meanwhile, Mr. Remolona said they are also planning to grant regulatory relief measures for the local banking sector, particularly lenders from the informal sector and low-income businesses.

“Actually, we’re contemplating the same things we did with bank lending to the informal sector and to low-income small businesses. We’re going to have a standardized restructuring if a loan is default,” he said. “We’re going to postpone some payments depending on the sector. So, very similar to what we did during (the COVID-19 pandemic),” the BSP chief said.

Long pause ahead

On the other hand, several analysts have already noted a likely pause prior to the BSP’s off-cycle announcement.

Singapore-based DBS Bank said early on Thursday that soaring pump prices and a weakening peso amid the Middle East war may prompt the central bank to hold steady for a long period.

In an e-mailed note, DBS Senior Economist Radhika Rao said they now see the BSP opting for a prolonged pause rather than delivering a final cut as initially expected.

“Onshore financial markets have already been under pressure this month, with the peso (depreciated to a record low) and equity markets amongst the regional underperformers on (a) month-to-date basis,” she said. “The BSP will be wary of lowering rates further in this environment, preferring to stay on an extended pause.”

Meanwhile, New Zealand-based ANZ Research noted that lingering growth woes and rising inflation risks complicate the BSP’s policy path.

Even as domestic activity remains sluggish, the BSP’s easing cycle has reached its end amid inflationary risks from rising costs of rice, electricity and fuel, the think tank said.

ANZ foreign exchange analyst Kausani Basak said markets are anticipating a rate hike from the central bank as the war drags on.

Ms. Basak said economic recovery will now depend on catch-up government spending, but the lack of a fixed timeline diminishes its capability as a growth driver.

“Domestic activity weakness has become more pronounced in recent months,” she said. “Its recovery will depend on a pickup in public capex (capital expenditure), with the revival timeline still unclear.”

The flood control corruption scandal last year dampened government spending, household consumption and investments, dragging GDP growth to a post-pandemic low of 4.4%.

Government spending has declined year on year for six straight months. In January, it was down by 23.9% to PHP 303.5 billion from PHP 398.8 billion a year ago.

Meanwhile, infrastructure spending has also fallen for five consecutive months, declining by an annual 45.2% to PHP 48 billion in November. — Katherine K. Chan, Reporter