BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to raised interest rates for the first time more than two years as inflation risks increase amid tensions in the Middle East, according to a narrow majority of analysts in the survey.
A BusinessWorld a survey conducted last week showed that 11 out of 19 analysts expect the Monetary Board to raise the repurchase rate target by 25 basis points (bps) at its policy meeting on April 23.
If possible, this would bring the benchmark rate to 4.5% from the current 4.25%, marking the BSP’s first tightening move between the two. years or from October 2023.
On the other hand, eight analysts said the BSP would likely keep its key rate unchanged, citing risks of commodity-driven inflation and weak growth prospects.
Since starting its easing cycle in August 2024, the central bank has lowered the policy rate by a total of 225 bps to a three-year low of 4.25%. It also kept borrowing costs unchanged at an off-cycle meeting last month to calm markets amid growing uncertainty from the war.
Most analysts said the Monetary Board is likely to raise rates on Thursday as a first step to bolster inflation expectations, as inflation appears to be breaching the 2-4% target if energy prices continue to rise.
“The 25-bp increase will allow the BSP to reaffirm its commitment to price stability, as it maintains a moderate and data-dependent stance going forward,” said Ruben Carlo O. Asuncion, economist at Union Bank of the Philippines.
Chief Economist at Metropolitan Bank & Trust Co. (Metrobank) Nicholas Antonio T. Mapa said in a Viber message that monetary tightening will help “inflationary expectations that may have been undermined by rising energy costs and subsequent inflation due to second-order effects.”
BSP Governor Eli M. Remolona, Jr. last week he told BusinessWorld that they have room to raise rates to reduce rising inflation amid the Middle East conflict as they expect government spending to support growth.
Mr. Remolona noted that the results of the second round may appear sooner than expected as it is expected that the oil price shock will spread to the world. domestic food and transportation costs.
In March, high oil prices due to the war pushed inflation to a nearly two-year high of 4.1%, faster than the BSP’s forecast of 3.1%-3.9% and the 2%-4% annual target.
“Although current pressures remain supply-driven, historical experience suggests long-lasting shocks tend to spill over into demand-side dynamics, increasing the risk of entrenched inflation expectations,” said Bank of the Philippine Islands (BPI) Economist Emilio S. Neri, Jr. in the report.
Chief Economist Rizal Commercial Banking Corp. Michael L. Ricafort commented in a Viber message that the BSP raised borrowing costs in 2022 when Russia’s invasion of Ukraine led to global crude oil prices breaking the $100 per barrel mark.
“It is possible that the BSP rate will increase, similar to the previous cycle in the past four years in an effort to curb inflationary pressure during the growing period and to better manage inflation and prevent it from going further, in an effort to return inflation to the target inflation range of 2%-4%, even if the unintended consequences include slowing the economy,” said Mr. Ricafort.
Marco Antonio C. Agonia, an economist and analyst at the University of Asia and the Pacific (UA&P), said in an email that Thursday’s move will be a one-off, while the BSP is on hold for a year.
“Given the soft growth environment, further price increases could be very detrimental to the economy’s performance,” said Mr. Agony.
Mr. Agonia noted that the rate hike will provide relief for the peso without using up large reserves.
Since the US and Israel began attacking Iran on Feb. 28, the peso weakened to break the P60-per-dollar level, hitting a record low of P60.748 on March 31.
“The peso will probably remain under pressure as the situation in the Middle East remains fluid. A sharp drop could increase inflation in other countries. This exchange-inflation feedback loop may eventually become a binding constraint, and may require a strong policy even in the face of supply-driven shocks,” said Mr. Neri.
HOLD?
Meanwhile, eight analysts expect the BSP to keep rates on hold on Thursday, as monetary tightening will not do much to counter the supply shock.
Philippine National Bank economist Alvin Joseph A. Arogo said in an email that the BSP should keep the policy rate at 4.25% on April 23 as the hike in financing costs appears to be at odds with an earlier move to provide loan assistance amid current liquidity constraints.
“Financial tightening this soon could jeopardize growth prospects without seriously damaging inflation,” he said.
In a report, DBS said the BSP is likely to keep rates unchanged amid slow growth.
“The Philippines is facing a possible stagflationary shock this year, with growth proving weaker than last year, while inflation is coming from a low point, and the peso remains under pressure,” DBS said.
China Banking Corp. (Chinabank) in a paper said the BSP is likely to adopt a “prudent wait-and-see approach” due to growing global uncertainty.
“At home, inflationary pressures continue to be largely driven by volatile conditions, while demand conditions are showing signs of softening, reducing the case for rapid monetary tightening,” Chinabank said.
ING said the weak outlook for growth would encourage the BSP to hold rates but expected Thursday’s decision to be “very close.”
“The Philippines remains one of the most oil-exposed economies in the region, which has made us lower our 2026 GDP (gross domestic product) growth rate to 4.5%. Faced with this weak growth – and assuming that the country’s growth is improving in the near term – our basic case is that the central bank remains on hold in April.
HAWKISH BSP
Meanwhile, Chinabank said concerns about a cut in inflation expectations are likely keeping the BSP hawkish.
“The Philippines is in the hawkish camp, leaving the door open to a slight tightening this year in case of price risks, as retail fuel prices tend to fluctuate in line with global prices,” DBS said.
Standard Chartered Bank Asia Economist and FX Analyst, Jonathan Koh, in a report said that although they do not expect a rate hike this month, the BSP may raise borrowing costs at its June 18 meeting.
“Inflation passthrough is likely to take in the coming months, driven by rapid spending, possible increase in transport costs, higher rice and food prices, and inflation from other countries driven by the Philippine peso, which may eventually lead to a one-rate hike to protect price stability,” said Mr. Koh.
On the other hand, Patrick M. Ella, an economist at Sun Life Investment Management and Trust Corp., said the central bank may even postpone the rate hike expected this week for the second half of the year if the Middle East conflict is resolved soon. – Aaron Michael C. Sy
