Philippines rate hike outlook strengthens as banks see BSP tightening into early 2027

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Philippines rate hike outlook

Highlights

Nomura forecasts the BSP will raise rates by 75 bps to 6.25% by February 2027, citing headline inflation near 7% and rising core inflation.
At its October 22 meeting, BSP unexpectedly hiked by 50 bps to 5.5%, marking four straight increases and cumulative tightening of 125 bps since April.
The peso dropped to P63.615 against the dollar on Friday, down 7.58% year-to-date, with persistent weakness and inflation driving expectations for continued BSP tightening.

Bank forecasts point to more tightening

As reported by BusinessWorld Online, Nomura expects the BSP to raise rates by another 75 basis points by February 2027, taking the policy rate to 6.25% as headline and core inflation continue to accelerate.

The Japanese bank says it pencils in a 50-bp increase at the next Monetary Board meeting in December, followed by a 25-bp move in the first quarter of 2027, likely in February. Nomura analysts Euben Paracuelles and Nabila Amani say the forecast reflects expectations for headline consumer inflation of around 7% in the next two months and further pickup in core inflation, which the BSP is likely to read as growing second-round effects.

ANZ Research also sees more tightening, but at a slower pace, with two 25-bp increases at the next two meetings that would bring the terminal rate to 6% in the first quarter of 2027. ANZ says risks remain tilted upward, depending largely on the severity of El Niño's effect on food prices and on crude oil movements.

Chinabank Research says the BSP's inflation concerns strengthen the case for a fifth straight rate hike in December, although it adds that tighter monetary policy may be less effective against supply-side pressures such as El Niño, transport fare adjustments and food costs. Security Bank likewise projects a quarter-point increase in December and says it no longer expects a 200-bp reserve requirement ratio cut in the fourth quarter of 2026, after Governor Eli M. Remolona, Jr. indicated the BSP does not want to ease reserve rules while tightening policy.

Citi is pricing in one 25-bp hike each in December and February, citing persistent inflation and foreign exchange risks into early next year. Oxford Economics also forecasts a 25-bp increase in December, though it expects the BSP to hold rates through 2027 after that move.

Inflation and peso weakness shape policy risks

At its Oct. 22 meeting, the BSP delivered a surprise 50-bp increase, its first move of that size since February 2023, lifting the benchmark rate to a nearly two-year high of 5.5%. The action marks the central bank's fourth consecutive tightening move and brings cumulative increases since April to 125 bps.

Remolona says the BSP acts more aggressively than usual because accelerating inflation and persistent price pressures have left policymakers slightly behind the curve. Headline inflation rises to 7.2% in September from 6.1% in August, matching the year's peak and staying above the central bank's 3% target for a seventh straight month. Core inflation also climbs to 4.7%, while the BSP forecasts inflation at 6.1% for 2026, 6% for 2027 and 3.3% for 2028.

Currency pressures are also feeding expectations for more tightening. Citi says elevated oil prices are affecting inflation not only through fuel and transport costs but also through foreign exchange pass-through, while Oxford Economics points to the peso's record weakness and a year-on-year fall in gross international reserves in September.

The peso hits fresh record lows for five straight trading days last week and falls to P63.615 against the dollar on Friday, from P63.52 a day earlier. Year to date, the currency is down P4.825, or 7.58%, from its Dec. 29, 2025 finish. Remolona says the BSP does not tighten policy to support the peso directly, adding that foreign exchange intervention remains limited to preventing sharp inflationary swings, while the Development Budget Coordination Committee expects the currency to trade between P60 and P62 against the dollar through 2030.

In our earlier article on the Philippine stock market rebound despite peso woes, we described how bargain hunting lifted the PSEi after early weakness even as the currency slid to a fresh record low near the P63-per-dollar level. We also noted that shifting foreign flows and heightened caution around macro conditions kept investors focused on FX moves as a key driver of sentiment.

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