Poll: BSP to hike rates by 25 bps anew

Persistent inflation pressures may warrant a third straight rate hike from the Bangko Sentral ng Pilipinas (BSP) this week, even as economic growth remains tepid, analysts said.

Based on a BusinessWorld poll conducted last week, 19 of the 24 analysts surveyed expect the Monetary Board to raise the target reverse repurchase rate anew by 25 basis points (bps) on Thursday, Aug. 27.

If realized, the key policy rate would climb to 5% from the current 4.75%, the highest in over a year or since the 5.25% in June 2025. It would also match the benchmark rate set in August last year.

On the other hand, five analysts see the Monetary Board standing pat as the weak economic growth backdrop clouds the BSP’s policy path. 

The Monetary Board began tightening in April as the energy shock dimmed its inflation outlook, delivering two 25-bp rate hikes in a row to bring its benchmark interest rate to 4.75%.

Most analysts said the BSP must continue tightening to contain broadening price pressures, especially with headline inflation holding above its target.

However, the sluggish gross domestic product (GDP) growth may keep the Monetary Board from acting aggressively.

“Weaker GDP growth in Q2 and softer inflation in July have reduced the case for a larger move,” Oxford Economics Assistant Economist Jun Hao Ng said in an e-mail.

“However, rising food prices and persistent tensions in the Middle East are likely to keep inflation elevated through the second half, while second-round effects remain a concern. In our view, this will warrant further tightening,” he added.

Risks of faster imported inflation amid renewed pressure on the peso likewise warrant another 25-bp rate increase, Moody’s Analytics Assistant Director and Economist Sarah Tan said.

“While weak second-quarter GDP growth could prompt a pause, we think the odds are tilted towards another 25-basis-point hike,” she said via e-mail. “Inflation remains sticky and well above the BSP’s target range, while renewed peso weakness adds to imported inflation pressures and complicates the path back to price stability.”

Inflation a key concern

Meanwhile, some analysts noted that inflation concerns could outweigh growth woes, adding that the central bank will likely prioritize its inflation-targeting mandate.

“The weak Q2 GDP print will unlikely derail BSP’s hiking cycle given its orthodox approach to its inflation-targeting framework,” Nomura Chief ASEAN Economist Euben Paracuelles said in an e-mail. “BSP remains very much on the ball in trying to anchor inflation expectations and bring back inflation to the target.”

Headline inflation cooled for a third straight month at 6.2% in July. This was, however, the fifth month in a row that inflation settled above the central bank’s 3% target.

As of July, the headline print averaged 5%, still below the BSP’s 6.4% estimate for the year.

On the other hand, core inflation, which excludes volatile food and energy prices, eased to 4.2% in July from 4.4% in June, but accelerated from 2.3% a year earlier.

Marites M. Tiongco, a professor at De La Salle University’s (DLSU) Carlos L. Tiu School of Economics, noted inflation persistence and expectations will be among the BSP’s top considerations for its next policy decision.

“First, the BSP will look at the persistence of inflation, not just the headline rate,” she said in a Viber message. “The crucial question is whether inflation is broadening into core goods and services, or whether current price pressures remain concentrated in food, energy, transport, and other supply-side components.”

“Second, it will assess whether inflation expectations remain anchored. If households, firms, and wage setters begin to expect persistently high inflation, the case for further tightening becomes stronger because temporary shocks can become embedded in wages and prices,” Ms. Tiongco added.

Earlier this month, BSP Governor Eli M. Remolona, Jr. said inflation expectations remain well anchored, with the BSP’s latest Survey of External Forecasters showing headline inflation could ease to 5.4% over the next 12 months from the 6% estimate as of June.

Still, Mr. Remolona left the door open for further hikes to bring inflation back to their target, but noted that the tepid second-quarter growth print means they can be less aggressive in taming price pressures.

“A final hike would reinforce the BSP’s commitment to price stability while preserving policy credibility,” Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said.

Pause?

Meanwhile, the analysts calling for a pause on Thursday said the BSP may opt to wait-and-see as tighter monetary policy risks further straining the already fragile economy.

“The case for a hold is getting stronger because the economy is already operating below potential, leaving little evidence of demand-driven inflation that would warrant another immediate hike,” China Banking Corp. Chief Economist Domini S. Velasquez said in an e-mailed note.

For Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, the BSP could strike a balance between inflation and growth concerns by standing pat while communicating its inflation-driven policy path ahead.

“It allows the BSP to assess the cumulative effects of past tightening while preserving flexibility,” he said in an e-mail.

“Keeping rates unchanged would still represent a restrictive monetary stance, and the BSP could clarify that future decisions will depend on whether inflation continues its path back toward the target range or whether new inflationary pressures emerge,” he added.

In the second quarter, GDP growth slowed to 2.3% from 5.4% a year ago and 2.8% in the previous quarter as the oil shock-driven inflation dampened household spending and lingering governance issues weighed on investments.

This was the fourth consecutive quarter of economic slowdown, marking the economy’s worst performance since the pandemic or when it contracted by 3.8% in the first quarter of 2021. Excluding the pandemic, it was the slowest expansion in over 16 years or since the 1.8% in the fourth quarter of 2009.

In the first half of 2026, GDP growth stood at an average of 2.6%.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco likewise noted that headline inflation as well as the second-order effects may have peaked, giving the BSP more reason to hold for now.

“Clearly, the worst of the inflation spike from the war is over, and the economy is still battling with an ongoing slowdown in headline growth,” he said in an e-mail. “It’s worth highlighting too the minor slip in core inflation in July, which indicates that second-round effects have probably topped out.”

According to Mr. Chanco, full-year inflation could settle at 5.3% this year and return to the BSP’s target at an average 2.7% next year. These are slower than the central bank’s forecasts of 6.4% and 4.5%, respectively.

“If we’re right about the BSP pausing (this) week, then this stand-still could hold for the foreseeable future, until the middle of next year, when we expect its postwar tightening to be reversed,” he added.

Tightening room

For S&P Global Market Intelligence Principal Economist Harumi Taguchi, the BSP still has room to deliver up to a fourth 25-bp rate hike as inflation remains well above target.

“Persistent inflationary pressures from elevated global oil and fertilizer prices, along with the potential impact of El Niño, would support further BSP tightening,” Ms. Taguchi said via e-mail.

“Conversely, signs of weaker economic growth — such as slower remittances, FDI (foreign direct investment), lending, industrial production, exports, and GDP growth — could signal an end to the tightening cycle,” she added.

Deepali Bhargava, regional head of research for Asia-Pacific at ING Bank NV, likewise sees the BSP only ending its tightening cycle once the benchmark rate hits 5.25%.

“Persistent core inflation, rising wages and lingering food-price risks should keep policymakers focused on ensuring inflation expectations remain anchored, supporting our expectation of further rate hikes by the BSP,” she said in an e-mail. “We expect one final hike by BSP in 4Q taking the terminal rate to 5.25%.”

On the other hand, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. expects additional rate hikes through yearend, citing lingering price risks and an anticipated growth recovery in the second half.

“We see at least two more hikes after (the) Aug. 27 hike,” he said in a Viber message. “Recent oil prices (and) El Niño risk remain elevated. We also think growth will improve in 2H2026 although still below our usual 4% to 6% growth.”

However, DLSU’s Ms. Tiongco said the BSP should end its tightening cycle at a 5% terminal rate, even if headline inflation remains above target, to avoid the ill effects of excessive tightening.

“The BSP must be careful not to fight yesterday’s inflation with tomorrow’s recession,” she said. “With GDP growth at only 2.3% and seasonally adjusted inflation showing virtually no month-on-month increase, the question is no longer simply whether inflation is high, but whether another rate hike would materially reduce inflation or merely deepen the slowdown.”

After its August meeting, the Monetary Board is scheduled to hold its last two regular policy reviews this year on Oct. 22 and Dec. 17. — Katherine K. Chan, Reporter