BSP raises rates to 4.75% as Middle East conflict fuels inflation

The Philippine central bank raised its benchmark rate to 4.75% on Thursday, joining regional peers in tightening policy as the Middle East conflict keeps inflation above target.

The Bangko Sentral ng Pilipinas lifted its target reverse repurchase rate by 25 basis points to 4.75%, seeking to contain inflation that has stayed above its 2% to 4% target since the conflict drove up energy and food costs. The decision aligns with the majority of 30 analysts surveyed by Bloomberg, 23 of whom expected a quarter-point move, while the rest had called for a larger 50-basis-point increase.

"With real interest rates still deeply negative, the BSP is highly exposed if global supply chains get hit again," said Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, who had advocated for the larger increase.

Inflation stood at 6.8% in May, and the central bank expects it to average above target through 2027. The Philippine economy expanded just 2.8% in the first quarter, the weakest pace outside the pandemic since 2009, as household spending — which accounts for about 80% of national output — slowed even before the war sent prices soaring. The peso has regained some ground after hitting a record low of 61.750 per dollar earlier this month, but remains down 2.6% in 2026.

The rate increase risks further damping growth in an economy still recovering from a massive corruption scandal in 2025, but the BSP has limited room to pause. Further peso depreciation would amplify imported inflation, making the exchange rate an increasingly important policy consideration, Neri said. Overnight-index-swap markets currently price a roughly 60% probability of another 25-basis-point hike at the BSP's next meeting in August.

Inflation Pressures Persist Beyond Oil

The Philippines sources nearly all its oil from the Middle East, and policymakers estimate it could take up to a year for domestic fuel prices to return to prewar levels even after the US and Iran signed an interim peace deal on June 17. While oil prices have declined since the agreement, HSBC Holdings economist Frederic Neumann warned that rate hikes in Asia were "always more than just about energy."

"Food prices risk pushing higher over the coming months — a delayed reaction to costly fertiliser during the planting season — and broader supply chain pressures are still rippling through the system, including spillovers from the red-hot AI hardware sector," Neumann said.

The BSP's last rate increase before Thursday was a 25-basis-point move in May. The current tightening cycle has lifted the benchmark from 4% at the start of 2026, with the central bank prioritizing currency stability as the peso's weakness threatens to import additional inflation. The last time the BSP faced a comparable inflation trajectory was in 2023, when it raised rates to 6.5% before inflation receded below target.

Regional Tightening Cycle Intensifies

Bank Indonesia is also expected to raise its benchmark BI-Rate by 25 basis points to 5.75% on Thursday, according to 25 of 40 economists surveyed by Bloomberg. Both economies have been among the worst-performing currencies in Asia since the conflict began, with the rupiah slumping nearly 6% in 2026 before recovering from a record low near 18,200 per dollar.

The calculus for Asian policymakers has shifted rapidly. The US Federal Reserve held rates steady in its first decision under Chair Kevin Warsh, who vowed to curb inflation, and traders now price in two hikes by April. Higher US rates could further pull portfolio flows away from emerging markets like the Philippines and Indonesia, adding pressure on their central banks to keep tightening.

OCBC economist Lavanya Venkateswaran said both central banks will likely remain hawkish in their messaging, signaling vigilance on price pressures in the Philippines and rupiah stability in Indonesia. "The deal will make the external backdrop more favorable but the fundamental risk factors have not changed," she said.

The BSP's next policy meeting is scheduled for August, where markets will watch for further tightening if inflation data continues to run above target. CIMB Bank analysts Lim Yee Ping and Michelle Chia wrote in a June 15 note that they expect BI to deliver another 25-basis-point rate hike as monetary policy provides near-term support for the rupiah while the government works to restore fiscal credibility — a dynamic that mirrors the BSP's own policy calculus.

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