BSP ready for monetary policy adjustments amid growing inflation risks

By Katherine K. Chan, Reporter

THE Bangko Sentral ng Pilipinas (BSP) said it may take “all necessary monetary actions” to keep inflation in check amid rising price pressures after the April print exceeded its estimate.

“The April 2026 inflation of 7.2% settled above the BSP’s announced forecast range of 5.6% to 6.4%, highlighting the upside inflation risks emanating from the global oil price shock,” the central bank said in a statement released late on Tuesday.

The April figure, which reflected still elevated energy prices propping up costs of food and utilities, also exceeded the 5.5% median forecast in a ����ý poll of 17 analysts.

However, April was not the first time the BSP’s forecast missed the mark. In March, it projected headline inflation to come in between 3.1% and 3.9%, only for the actual figure to be 4.1%.

Following this, the BSP assured the public that it will work to bring inflation back to its 3% target as part of its price stability mandate.

“Looking ahead, the Monetary Board will continue to be guided by incoming data,” the central bank said. “The BSP stands ready to take all necessary monetary actions to ensure that inflation returns to the three-percent target, consistent with its primary mandate of maintaining price stability.”

Last month, the BSP delivered its first 25-basis-point (bp) rate hike in two and a half years to bring the benchmark policy rate to 4.5%. This move ended its easing cycle where it slashed key borrowing costs by a cumulative 225 bps from August 2024 to February this year.

BSP Governor Eli M. Remolona, Jr. has said that they could keep lifting key rates to curb inflation, as they turn optimistic on the country’s growth prospects.

The central bank earlier raised its full-year inflation forecast to 6.3% from 5.1%, noting that the headline print will likely stay above 5% throughout the year.

For GlobalSource Partners Principal Advisor Diwa C. Guinigundo, the central bank can still resort to monetary policy tightening even as the energy crisis is largely supply-driven.

Hiking rates, the former central banker noted, would allow the BSP to counter second-order effects and keep inflation expectations anchored, especially amid lingering uncertainties over the war.

“Critics argue that monetary tightening is ineffective against supply shocks. That is only partially correct,” Mr. Guinigundo said in a May 5 commentary.

“A policy rate increase will not produce oil or harvest rice. But it can shape behavior, which is precisely what matters once second-round effects begin,” he added.

Mr. Guinigundo noted that BSP tightening would also curb demand, limiting firms’ ability to aggressively pass on costs, and help contain wage-price spirals in transport and services.

Meanwhile, Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said the odds for an off-cycle move remain low despite the over three-year high inflation in April.

“April’s 7.2% inflation, alongside the rise in core inflation to 3.9%, clearly tilts inflation risks further to the upside and warrants continued policy vigilance from the Bangko Sentral ng Pilipinas,” he told ����ý in a Viber message. “However, an offcycle rate hike is not yet the base case.”

The BSP last raised the policy rate in an off-cycle meeting in October 2023, when the economy was still grappling with hot inflation amid a global oil shock triggered by the Russian invasion of Ukraine.

“A hike outside the regular policy calendar would be more likely if core inflation continues to rise, inflation expectations begin to deanchor, or peso pressures intensify,” said Mr. Asuncion.

“For now, we expect the BSP to retain a tightening bias, favoring measured, incremental adjustments within scheduled meetings, supported by strong communication to anchor expectations and contain second-round effects,” he added.

The BSP chief told ����ý last month that they are now focusing on core inflation among the many data points guiding their monetary policy decisions.

In April, core inflation, which excludes volatile food and fuel prices, quickened to an over two-year high of 3.9% from 3.2% in March and 2.2% last year.

For now, Mr. Guinigundo said policymakers should focus on building buffers against the swift transmission of global shocks into the local economy.    

This includes maintaining a credible stance against inflation, closely monitoring spillover effects on wages and transport fares, rolling out targeted fiscal measures, and diversifying energy sources while enhancing logistics resilience.

“Because in this episode, what matters was not whether the war paused-but that its economic consequences never did,” Mr. Guinigundo said.

POSSIBLE OFF-CYCLE MOVE
On the other hand, Citigroup, Inc. (Citi) sees a potential off-cycle 25-bp rate hike this month, alongside two consecutive scheduled increases before yearend.

“Following higher than expected April inflation, we see (three) 25-bps BSP rate hikes for the rest of 2026, including a likely off-cycle May hike,” it said in an e-mailed note on Wednesday.

The bank upwardly revised its 2026 inflation estimate to 7.3% from 5.7%, and hiked its 2027 projection to 4.6% from 3.7%, as it noted that oil prices will likely remain “higher for longer.”

Citi also left the door open for a single 50-bp hike within the month or by June, citing the BSP’s past hiking cycles in 2018 and 2022.

“We see a 50-bp hike as a risk, rather than a baseline hike scenario at this juncture — At face value, BSP historically hiked more aggressively by 50 bps or even 75 bps in a single meeting when headline inflation reached the 6-7% in both the 2022 and 2018 hiking cycles, and thus, a more aggressive 50-bp hike in May (or more likely June), remains possible,” Citi said.

Michael Wan, senior currency analyst at MUFG Bank, Ltd., also sees room for an off-cycle move and large hikes totaling 75 to 100 bps this year.

“Nonetheless, given the relatively weak starting point of growth in the Philippines in part driven by the fiscal tightening with the flood control projects scandals, we think that BSP’s focus is more on containing inflation expectations, rather than to target demand destruction given the current negative output gap,” he said in a separate note.

“Managing the FX (foreign exchange) pass-through to inflation from a weaker peso is with that also another key objective.”

Meanwhile, Mr. Wan expects the peso to trade near P62 to P63 against the dollar as oil trade disruptions continue to weigh on the local currency.

“We continue to think that PHP (Philippine peso) remains vulnerable and should underperform across a range of scenarios, and see USD (US dollar)/PHP possibly rising closer to 62.00 to 63.00 if the Strait of Hormuz remains closed,” he said.

“In our base case of de-escalation, we think USD/PHP could recover gradually towards the 60.50 to 61.50 range,” he added.

The peso remains above P61 per dollar, a level it first breached last month as soaring global oil prices sparked inflation worries. It slumped to a record-low finish of P61.567 versus the greenback on April 29.

Citi noted that the economy could face heavier inflationary pressure from the local unit’s persistent weakness, a factor the BSP may consider in its upcoming policy decisions.

“In addition to adjusting to the April inflation surprise, the BSP perhaps may start to price-in stronger FX pass-through,” it said. “FX pass-through apparently was not a big concern in the last policy meeting; but the PHP has further devalued 2% since (cumulatively 6% year-to-date) on a NEER (nominal effective exchange rate) basis and the expected deterioration of PH’s energy trade deficit may continue to prop-up FX demand.”