BSP raises benchmark rate to 4.75% on persistent inflation

The Philippine central bank raised rates for a second straight meeting as the Iran war's inflationary shock outweighed the weakest economic growth since the pandemic.

The Bangko Sentral ng Pilipinas lifted its benchmark overnight reverse repurchase rate by 25 basis points to 4.75% on Thursday, matching the move in April, as multi-year high inflation from the Middle East conflict continued to pressure consumer prices. The central bank also raised its benchmark lending rate to 5.25% from 5.00%.

"The BSP should deliver a total of 75 basis points more in rate increases this year as the US-Iran pact remains fragile," said Louise Loo, head of Asia economics at Oxford Economics. "The costs to credibility from perceived inaction build up non-linearly over time."

The decision was widely expected by 23 of 30 economists surveyed by Bloomberg, with the rest calling for a larger 50-basis-point increase. Inflation stood at 6.8% in May, moderating from 7.2% in April but still marking the third straight month above the central bank's 2% to 4% target. Core inflation accelerated to 4.1%, overshooting the target for the first time in more than two years. The peso, which hit a record low of 61.75 to the dollar earlier this month, has recovered some ground after the US and Iran signed an interim peace deal on Wednesday. Local equities fell 2.1% on Wednesday to 6,114.81 as investors locked in gains ahead of the rate decision.

The BSP faces a delicate balancing act as it tries to tame inflation without crushing an already fragile economy. Gross domestic product expanded just 2.8% in the first quarter, the weakest since 2009 outside the pandemic, as household spending — which accounts for about 80% of national output — slowed to its lowest since 2010. The US-Iran peace deal, signed Wednesday, has sent Brent crude prices down about 25% from a month ago to below $83 a barrel, offering some relief. Nomura estimates every 10% decline in oil prices could reduce Philippine inflation by about 0.5 percentage point, the largest disinflationary impact in the region.

Rate path hinges on oil, food prices

Oxford Economics projects the BSP will need to deliver another 50 basis points of tightening by year-end, bringing the key rate to 5.25%, even as the peace deal eases energy costs. The last time the BSP embarked on a tightening cycle of this magnitude was in 2022-2023, when it raised rates by a cumulative 450 basis points to combat post-pandemic inflation. The central bank's next policy review is scheduled for Aug. 27.

"Once inflation expectations become unanchored, restoring confidence often requires substantially more aggressive policy action," said Diwa Guinigundo, a former BSP deputy governor and now principal adviser at GlobalSource Partners. "This places a premium on maintaining the BSP's credibility today."

The BSP's challenge is compounded by weak monetary policy transmission. Interest rate adjustments typically take one and a half to two years to fully filter through the financial system, according to BSP Governor Eli Remolona. Oxford Economics' Loo said economies with weak transmission, including the Philippines, may need larger headline moves because "each hike buys less credibility unless it's large enough to change expectations."

Overnight, the Federal Reserve held rates steady with officials saying their next move could be a hike. The Bank of Japan raised rates to a 31-year high earlier this week, while the Reserve Bank of Australia held after three consecutive increases. The coordinated global tightening shows the persistent inflation challenge facing central banks worldwide.

This article is for informational purposes only and does not constitute investment advice.