MANILA – The Bangko Sentral ng Pilipinas (BSP) has raised its benchmark interest rate for the first time in more than two years, signaling a shift in monetary policy as a deteriorating inflation outlook, exacerbated by the conflict in the Middle East, prompts preemptive action.
Rate Hike Signals Inflation Concerns
On Thursday, the BSP increased its target reverse repurchase rate by a quarter of a percentage point to 4.5%. This move was anticipated by a majority of economists surveyed by Bloomberg News, with 15 out of 30 predicting the hike, while the remainder expected no change.
In a statement, the central bank explicitly linked the decision to the ongoing conflict in the Middle East. ‘The inflation outlook has deteriorated amid the ongoing conflict in the Middle East,’ the BSP stated. ‘Timely and preemptive policy action’ is deemed necessary to protect price stability, as escalating global oil and fertilizer prices are expected to translate into higher domestic fuel and food costs.
The peso saw its losses widen slightly after the announcement, trading 0.5% lower against the dollar at 60.40. The main stock index, however, remained steady.
End of Easing Cycle, Inflation Forecasts Deteriorate
This latest policy adjustment marks the official end of a prolonged easing cycle that commenced in August 2024. It underscores the rapid escalation of risks for the Philippines, a nation heavily reliant on imports for nearly all its oil requirements, sourced predominantly from the Middle East.
Even with this rate increase, the BSP cautioned that average headline inflation is projected to exceed the target range of 2%-4% for both 2026 and 2027. This forecast highlights the persistent inflationary pressures facing the economy.
The Philippines now joins Singapore as one of the early movers towards monetary tightening in Asia. In contrast, Indonesia maintained its rates on Wednesday, and Thailand has indicated a pause at its upcoming meeting.
Anchoring Expectations and Supporting Recovery
‘The policy rate increase is intended to anchor inflation expectations and contain the buildup of second-round effects,’ the BSP explained. The central bank emphasized that ‘a measured increase in the policy rate will still accommodate economic recovery over the medium term,’ suggesting a balancing act between controlling inflation and supporting growth.
Inflation in the Philippines had already accelerated in March, reaching its fastest pace in nearly two years and surpassing the 2%-4% target. This acceleration was attributed to rising oil costs, which subsequently drove up prices for transportation, food, and utilities.
BSP Governor Eli Remolona had previously indicated concerns about potential second-round price pressures appearing sooner than anticipated. The central bank has since adopted a more hawkish stance.
Shift in Policy Stance
During an off-cycle meeting in March, where the BSP opted to keep the key rate unchanged, the bank had acknowledged that monetary policy had ‘limited effectiveness’ against supply shocks. Earlier this month, the BSP issued a further warning, stating that a ‘sharp and prolonged’ oil price shock could trigger spillover effects and dislodge inflation expectations.
The current rate hike reflects a proactive approach by the BSP to counter these escalating inflationary risks, aiming to stabilize prices and maintain economic confidence in the face of global uncertainties.
