Central bank must tighten to stave off second-round inflation — GlobalSource
THE BANGKO SENTRAL ng Pilipinas (BSP) should begin tightening this week to manage inflation expectations and potential second-round price effects, GlobalSource Partners said.
“The evidence is no longer ambiguous — inflationary pressures are broadening, deepening, and becoming more persistent. We therefore believe that the BSP will initiate tightening monetary policy in tomorrow’s meeting of the Monetary Board,” GlobalSource Partners Philippine Analyst and Principal Advisor Diwa C. Guinigundo said in a commentary on Wednesday.
“A measured but firm response is warranted. At minimum, a 25-bp (basis point) increase in the policy rate is justified, with readiness to follow through as conditions evolve… The cost of acting late will far exceed the cost of acting now. Monetary policy must move ahead of the curve, not behind it.”
A BusinessWorld poll showed that 11 out of 19 analysts expect the Monetary Board to hike the target reverse repurchase rate by 25 bps at its policy meeting on Thursday. This would bring the benchmark rate to 4.5%, marking the first tightening move from the BSP since October 2023.
The BSP slashed borrowing costs by a total of 225 bps from August 2024 to February this year. In an off-cycle meeting last month, it kept rates steady but signaled vigilance and readiness to act amid war-driven shocks, which it expects to stoke domestic consumer prices.
BSP Governor Eli M. Remolona, Jr. earlier told BusinessWorld that they have room to tighten to mitigate second-order inflation effects as faster public spending can support growth moving forward.
Mr. Guinigundo said the supply-driven global oil shock is now transmitting to the demand side, which raises the risk of a self-fulfilling price spiral.
“Elevated fuel prices have cascaded into higher transport, freight, and logistics costs, with second-round effects spreading across goods and services. Utility rate adjustments are imminent. The restoration of rice tariffs further compounds the risk, given rice’s significant weight in the consumer price index. These are not isolated shocks; they are becoming embedded in the price system… While initial shocks were supply-driven, the window to preempt second-round effects has narrowed. Delay now risks embedding inflation further into wages, contracts, and expectations,” he said.
With business and consumer outlooks worsening due to the conflict, inflation expectations could be disanchored.
“Once this occurs, policy becomes more costly and less effective. The early signs are already visible: core inflation rose from 2.4% to 3.0% in the first quarter of 2026, signaling underlying and persistent price pressures. This is not demand strength — it is price-driven spending that will ultimately erode real purchasing power and trigger demand destruction.”
The BSP’s earlier easing bias has supported growth, but with risks intensifying, it must prioritize price stability to ultimately preserve macroeconomic stability, Mr. Guinigundo said.
“The risk environment remains highly uncertain, with geopolitical developments including potential escalation driven by major political actors who are capable of prolonging supply disruptions and amplifying inflationary pressures.” — Justine Irish D. Tabile
