BSP raises benchmark rate by 50 basis points to 5.50%

MANILA — The Bangko Sentral ng Pilipinas (BSP) raised its benchmark interest rate by 50 basis points to 5.50% as inflation fears and a weakening peso piled on pressure for the central bank to keep borrowing costs high.

BSP Governor Eli Remolona Jr. announced the Monetary Board’s decision on Thursday, Oct. 22. It marked the fourth consecutive increase in the target reverse repurchase (RRP) rate this year.

The interest rates on the overnight deposit and lending facilities were adjusted to 5.00% and 6.00%, respectively.

“We took this decisive action because we forecast that inflation will accelerate further in the coming months due to oil prices, transport fares, and the potential effects of El Niño on food prices,” Remolona said.

The decision follows a jump in inflation to 7.2% in September from 6.1% in August, well above the BSP’s 2% to 4% target.

Core inflation, which excludes selected volatile food and energy items, also climbed to a three-year high of 4.7%. The BSP said this indicates underlying price pressures spreading across the economy.

Remolona said the numbers were “worse than we thought” and inspired “a bit of a sense of urgency to dampen these inflationary pressures,” leading to the big rate hike.

The BSP now expects inflation to remain high until 2027 and has revised its 2027 projection to 6.0%. Before Thursday’s decision, it had projected inflation to average 6.1% in 2026 and 5.4% in 2027, both above its target range.

The central bank expects average headline inflation to approach its 3.0% target in 2028. Core inflation is projected to continue rising.

Renewed tensions in the Middle East have driven global oil prices higher. Upside risks to inflation have also materialized with the recent increase in transportation fares, while El Niño conditions continue to threaten agricultural production and prices.

The weakening peso has further aggravated concerns. The currency closed at a record-low PHP 63.361 against the dollar ahead of the decision.

A weaker peso makes imported fuel, food, and raw materials more expensive, adding to domestic inflation.

Remolona emphasized that the BSP does not track exchange rates when making its forecasts, as it does not defend the peso. He said the central bank participates in the foreign exchange market only in an interventionist role to dampen big swings in exchange rates, as these may be inflationary.

By making borrowing more expensive, the BSP hopes to slow spending and ease inflation. Higher interest rates could also weigh on consumption and investment, however, at a time when Philippine economic growth has already slowed to 2.3% in the second quarter.

There are also limits to what higher interest rates can achieve. Much of the current inflation is driven by supply-side pressures, including disruptions to food production due to bad weather, rising global oil prices, and the threat of El Niño, none of which monetary policy can directly address.

Domestic economic activity is nonetheless expected to recover, supported by fiscal measures.

The Monetary Board said a strong response was needed to broadening price pressures and further upside risks to inflation. It said the move makes monetary policy appropriately restrictive, which will contain second-round effects and firmly anchor inflation expectations.

The latest increase was widely expected, though a 50-basis-point hike leans toward the high end of estimates.

In an Oct. 20 GlobalSource Partners report, former BSP deputy governor Diwa Guinigundo and economist Wilhelmina Manalac called for a 50-basis-point hike to prevent inflation from becoming more entrenched. They acknowledged the risks to an already struggling economy.

BPI lead economist Emilio Neri Jr. expects another 25-basis-point increase in December, which could bring the policy rate to only 5.75% by year-end. Further hikes in 2027 remain possible, depending on inflation and El Niño.

The Monetary Board’s final scheduled policy meeting for 2026 is on Dec. 17. Remolona maintained that the board remains open to further hikes if necessary.

The BSP said it stands ready to take further monetary policy action as necessary to ensure the timely return of inflation to the target, in keeping with its price stability mandate.