BSP raises rates, signals more hikes

By Aaron Michael C. Sy, Reporter

THE PHILIPPINE central bank increased its benchmark interest rate for the first time in more than two years, while signaling that more “small” interest rate hikes could follow to safeguard spiraling prices due to the Iran war.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) raised the target reverse repurchase rate by 25 basis points (bps) to 4.5% at its policy meeting on Thursday, effectively ending an easing cycle that cut the benchmark rate by 225 bps starting in August 2024.

The central bank also adjusted the interest rates on its overnight deposit and lending facilities to 4% and 5%, respectively.

“Once we start raising the policy rate, we’re likely to raise it again,” BSP Governor Eli M. Remolona, Jr. told a news briefing after the policy decision. “That’s a better strategy than raising it just one time and making a big hike instead of a small one.”

He noted that monetary policy involves “several steps” to “minimize disruptions to the economy.”

The decision was in line with the expectations of 11 of 19 analysts in a BusinessWorld poll last week.

It followed an off-cycle meeting last month where the BSP held rates steady as it sought to calm markets amid growing uncertainties.

Mr. Remolona said the central bank raised borrowing costs to keep inflation expectations anchored and contain the buildup of spillover effects.

“Inflation expectations are rising further, increasing the risk that they will de-anchor from our target,” he said. “This can cause inflation to become persistent, hurting households as well as businesses.”

The BSP raised the policy rate based on a scenario that oil futures would remain high in the near term, with spot prices close to $100 a barrel, before gradually declining at the end of the year and further into 2027.

Mr. Remolona said supply shocks have already affected the prices of certain items in the consumer price index.

“For now, yes, it’s mainly a global supply shock,” he said. “But we’re beginning to see spillover effects into other items in the consumer basket. And the prices of those other items are affected by domestic demand.”

In March, headline inflation rose to an almost two-year high of 4.1%, faster than the BSP’s 3.1%-3.9% forecast and 2%-4% target for the year.

The decision to raise interest rates was not unanimous, Mr. Remolona said, adding that the BSP had considered a 50-bp rate increase but decided against it to avoid any large moves.

Clearer evidence of a sharp and prolonged oil price shock de-anchoring inflation expectations would warrant a bigger hike, he added.

The central bank now expects inflation to average 6.3% this year and 4.3% next year, both above its 4% ceiling, before returning to its tolerance range in 2028.

“It will remain above 5% for most of this year,” BSP Deputy Governor Zeno Ronald R. Abenoja told the same briefing. “We don’t think it will de-anchor, but if it’s possible it will de-anchor, then we would have to change our strategy.”

‘TOLERANCE RANGE’

Mr. Remolona said the BSP would have to increase borrowing costs gradually to avoid slowing economic growth.

“The idea is not to bring it back to within the tolerance range right away,” he said. “Because if we try to do that, then it’s very costly for the economy. What we want is to bring it down to within the tolerance range within a reasonable period without hurting the economy too much.”

In a separate statement, the central bank said the inflation outlook has worsened due to the war in the Middle East, which has driven up global oil and fertilizer prices.

These increases have begun feeding into domestic fuel and food costs, adding pressure on consumer prices.

At the same time, core inflation, which excludes volatile food and energy items, has continued to rise, indicating broader underlying price pressures across the economy.

The BSP said its latest projections show a higher inflation trajectory, with average headline inflation expected to exceed the 4% ceiling of its target range in both 2026 and 2027.

Inflation expectations have also increased, raising the risk that price pressures could become more entrenched if left unchecked.

“After considering its options, the Monetary Board deemed it necessary to take timely and preemptive policy action to safeguard price stability,” the central bank said.

The BSP said the rate increase aims to anchor inflation expectations and prevent second-round effects, such as higher transport fares and wages, from further fueling price increases.

“A measured increase in the policy rate will still accommodate economic recovery over the medium term,” it added.

The BSP reiterated that future policy decisions would be guided by incoming data, particularly developments in inflation and global conditions.

It added that it stands ready to take further monetary action as needed to bring inflation back to its 3% target, consistent with its mandate of maintaining price stability.

Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas in a Viber message said the BSP’s tightening move would support market sentiment and the peso.

Some analysts said the increase could be a “one-and-done” rate hike, citing growth risks, easing global crude oil price volatility and a ceasefire between the US and Iran.

“Risks are tilted towards further hikes if inflation expectations show strong signs of de-anchoring,” Oxford Economics Assistant Economist Jun Hao Ng said in a note.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the medium-term outlook for global oil prices has softened, while local pump prices have also rolled back.

“The Board’s next move is likely to be a rate cut at some point this time next year, when this external price shock starts to drop out of the year-on-year inflation picture,” he added. — with Norman P. Aquino