(April 23): The Philippine central bank increased its benchmark interest rate and signalled it was ready to deliver more hikes, with the Iran war likely to spur inflation beyond the official target through next year.
The Bangko Sentral ng Pilipinas raised its target reverse repurchase rate by a quarter of a point to 4.5% on Thursday, as predicted by 15 of 30 economists in a Bloomberg News survey. The rest expected no change.
“The inflation outlook has deteriorated amid the ongoing conflict in the Middle East,” the BSP said in a statement. “Timely and preemptive policy action” is needed to safeguard price stability as higher global oil and fertiliser prices feed into domestic fuel and food costs.
The peso held losses after the decision, closing 0.6% lower versus the dollar at 60.48, while the main stock index slid 0.1%.
BSP governor Eli Remolona said expectations of faster government spending also underpinned the decision. The hike officially ends a lengthy easing cycle that began in August 2024 and highlights how quickly risks have escalated for the Philippines, which imports nearly all of its oil requirements from the Middle East. It’s the BSP’s first rate rise in more than two years, and more may be on the way.
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“Once we start raising the policy rate, we’re likely to raise it again,” BSP governor Remolona said in a press briefing after the decision. “Further rate hikes are part of the calculation, but of course it will always depend on what data we see next.”
A 50-basis point hike was on the table but policymakers ultimately opted for a “measured increase” to allow room for economic recovery in the medium term.
“We’re not going to kill ourselves just to bring it down to within the tolerance range right away,” the governor said. “That’s a better strategy than raising it just one time and making a big hike instead of a small hike.”
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The BSP significantly raised its inflation forecasts from its last meeting in March, with the gauge now seen breaching the central bank’s 2%-4% target through next year. Price expectations have risen, heightening the risk of de-anchoring from the goal, it said.
“We’re more confident now that fiscal policy will be more stimulative than before,” Remolona said, alluding to a slowdown in state spending that followed the announcement of a graft probe last year. “Now, I think they have more or less controls in place and can begin to spend more.”
The nation is now one of the early movers towards monetary tightening in Asia, along with Singapore. Indonesia held rates on Wednesday, and Thailand has signalled it will pause at its meeting next week.
“The policy rate increase is intended to anchor inflation expectations and contain the buildup of second-round effects,” the BSP said.
Inflation in the Philippines quickened in March to the fastest in nearly two years and breached the 2%-4% target as costlier oil triggered higher prices for transport, food, and utilities.
If the conflict ends soon and traffic resumes through the Strait of Hormuz, further interest rate hikes will be highly unlikely, according to Jason Tuvey, deputy chief emerging markets economist at Capital Economics.
“Concerns about the inflation outlook will probably dissipate and they would probably shift their attention back to bolstering economic growth,” he said in a note.
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