Philippines central bank tightening seen extending as economists prioritize inflation control

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Philippines central bank tightening

Highlights

Bangko Sentral ng Pilipinas raised its benchmark rate by 50 basis points to 5.5%, totaling 125 basis points of hikes since April.
Economists expect the policy rate to reach 6% with one or two more quarter-point hikes by February, prioritizing inflation control over growth concerns.
Tighter policy is expected to weaken credit demand and consumption, with GDP growth averaging 2.6% in H1 amid inflation pressures and external shocks.

Rate path points to further policy tightening

As reported by BusinessWorld Online, economists say the BSP faces a trade-off between containing inflation and limiting further weakness in growth, but most see tighter policy as necessary to keep expectations anchored.

Last week, the Monetary Board raised its benchmark rate by 50 basis points to a nearly two-year high of 5.5%, bringing cumulative increases to 125 basis points since tightening began in April. The BSP now expects inflation to reach 6.1% this year and 6% next year, while headline inflation stood at 7.2% in September, matching this year’s peak first seen in April.

Alain Jomarie G. Santos of the University of Santo Tomas said higher rates may dampen spending and investment in the near term, but argued that unchecked inflation does more lasting damage by eroding household purchasing power. Marites M. Tiongco of De La Salle University also said the central bank is confronting a familiar dilemma, with weak growth and investment arguing against prolonged tightening even as inflation requires monetary restraint.

Several economists are still pricing in additional increases. Marco Antonio C. Agonia of the University of Asia and the Pacific expects two more quarter-point hikes in December and February, which would bring the policy rate to 6%, while Tiongco sees at least one more 25-basis-point move in December and does not rule out a larger increase if inflation expectations worsen or the peso weakens sharply. Deutsche Bank Research economist Junjie Huang, meanwhile, expects the BSP to pause in December before delivering another 25-basis-point increase in February 2027.

Inflation fight seen as key to sustainable recovery

Economists say the near-term cost of tighter monetary policy is likely to include weaker credit demand, softer consumption and subdued capital formation, especially as the Philippine economy has remained sluggish since last year. Gross domestic product expands by an average of 2.6% in the first half, amid disruption linked to the flood control scandal and the economic fallout from the Middle East war.

Leonardo A. Lanzona, Jr. of Ateneo de Manila University said higher-for-longer rates are likely to weigh on credit, consumption and investment at a time when growth is already soft. BSP Governor Eli M. Remolona, Jr. says the economy could rebound by the first quarter of 2027, supported by fiscal measures and improving sentiment once inflation eases, giving the central bank more room to pursue its inflation-targeting cycle.

At the same time, economists argue that monetary tightening alone cannot fully restore growth because much of the inflation episode is tied to supply-side pressures, including food and oil disruptions. They say government action on agriculture, infrastructure and energy remains important so that lower inflation can translate into a more durable recovery in household welfare, investment and business confidence.

In our earlier article on Bank Negara Malaysia’s policy guidance shift, we noted that the central bank signaled greater flexibility to raise rates if inflation pressures intensify, as markets began pricing in a higher probability of a hike. The piece also explained how the Middle East conflict and elevated energy prices are influencing inflation risks and rate expectations, while tracking impacts on the ringgit and local bond-yield volatility.

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