Commerzbank highlights that the BSP raised its policy rate by 25 basis points to 4.50%, signaling the start of a modern tightening cycle to anchor inflation expectations. Despite a hawkish tone and higher inflation forecasts, the peso has underperformed its regional peers since the Iran war as the Philippines remains highly exposed to Middle East energy prices.
Raising rates does not lift a feeble currency
“The Bangko Sentral ng Pilipinas (BSP) raised its target repo rate by 25 basis points to 4.50%. A Bloomberg poll found the market consensus split 50-50 on the interest rate hike. This was the BSP’s first rate hike since September 2023. The decision was intended to anchor inflation expectations and limit second-order inflation effects. Historically, the BSP has shown a low tolerance for pressure inflation. It tightened policy in 2018 and 2022 as the headline CPI rose above the BSP inflation target range of 2-4%, rising to 4.1% year-on-year in March 2026.”
“The BSP Governor of Remolona emphasized the central bank’s focus on price stability and revealed that a 50 basis point hike is being considered. He stated that this is the beginning of a modern cycle of interest rate hikes. The Remolona Governor noted that “once we start raising policy rates, we are likely to do so again.” The BSP downplayed the possible impact of higher interest rates on growth, suggesting that the current monetary policy stance “will continue to take into account economic recovery over the medium term.”
“On growth, the BSP lowered its full-year forecast to 4.3% from 4.6% previously, below the government’s target target range of 5-6%. The BSP said it was confident that fiscal policy was sufficient to support growth. However, risks tilted to the downside amid supply chain disruptions caused by the conflict in the Middle East. Support from fiscal policies will be limited by slower public spending and weaker sentiment economic in connection with several allegations of large-scale bribery against several politicians.
“Price pressures are expected to become more widespread in the coming months, primarily due to transportation costs and fertilizer price channels. As such, higher global commodity prices may spill over into goods and services in the core CPI basket, increasing the risk of second-order effects. The BSP is also monitoring inflation expectations to ensure that supply-side inflation pressures do not distort wage setting dynamics by keeping supply-side price pressures constant.”
(This article was created with the support of an artificial intelligence tool and has been reviewed by an editor.)
