Philippine Central Bank Hikes Rates to Combat Inflation

This decision, widely anticipated by economists polled by The Wall Street Journal, marks the second rate hike after April, as domestic inflation reaches multi-year highs. The BSP warns that price pressures remain strong, driven by global oil and fertilizer prices, which push up domestic fuel and food costs, and rising core inflation indicating broadening price pressures and unanchored expectations.

The central bank's latest projections show average headline inflation breaching its 4.0% tolerance ceiling in 2026 and 2027, and settling above 3% in 2028, which is still higher than the BSP's target. BSP Governor Eli Remolona stated the central bank has "a lot" more room to tighten, indicating a 50-basis-point move is possible depending on incoming data and the depth of the inflation shock.

This hawkish stance comes despite the risk of slowing already-weak economic growth, a dilemma faced by monetary authorities globally since the Iran war escalated. Responses from other central banks varied: the Federal Reserve held rates steady, Bank Indonesia tightened again, Japan's central bank lifted rates to a 31-year high, and Australian monetary authorities paused after three consecutive hikes.

While a freshly agreed U.S.-Iran peace deal has soothed some concerns about an energy shock, analysts warn that oil supplies will take time to normalize. Capital Economics economist Jason Tuvey forecasts the BSP will deliver at least one more 25-basis-point rate hike, but notes that more favorable inflation and peso trends could prompt the BSP to pause due to concerns about the weak economy.