BSP raises key rate to 5% amid inflation risks

By Francis Allan L. Angelo

MANILA – The Bangko Sentral ng Pilipinas raised its benchmark interest rate by 25 basis points on Thursday, Aug. 27, extending its tightening cycle as policymakers sought to control above-target inflation.

The Monetary Board increased the target reverse repurchase rate to 5 percent from 4.75 percent.

The BSP also raised the overnight deposit facility rate to 4.5 percent and the overnight lending facility rate to 5.5 percent.

The latest increase was the central bank’s third consecutive quarter-point hike in 2026.

The BSP has raised its benchmark rate by 75 basis points since April.

For the public, the decision presents a difficult trade-off between protecting purchasing power from persistent inflation and risking higher borrowing costs that could restrain household spending, business investment and economic growth.

Interest rates set by the BSP influence the cost of new and variable-rate loans, including financing used by consumers and businesses.

The hike reversed expectations that 2026 would bring monetary easing after policymakers spent much of the previous year anticipating rate cuts.

Renewed inflation pressures, including higher global oil prices following the Iran conflict, instead forced the central bank to tighten policy.

Headline inflation eased to 6.2 percent in July from 6.4 percent in June, but remained above the government’s 2 percent to 4 percent target range.

Average inflation during the first seven months of 2026 stood at 5 percent, according to BSP data released through the Philippine Information Agency.

Core inflation, which excludes volatile food and energy items, moderated to 4.2 percent in July from 4.4 percent in June.

Inflation experienced by households in the lowest 30 percent income group, however, accelerated to 8.2 percent from 8 percent.

That divergence highlights the heavier burden of rising food and other essential costs on low-income Filipino families.

The BSP said oil prices remained volatile despite the recent easing of headline inflation.

Severe El Niño conditions could also drive up agricultural prices and increase household food expenses.

Potential wage adjustments require close monitoring because businesses could pass higher labor costs to consumers through broader price increases.

“These underlying price risks require preemptive monetary action,” the BSP said.

Despite the latest policy increase, the central bank expects average headline inflation to remain above the 4 percent tolerance ceiling in both 2026 and 2027.

The BSP said its latest core inflation estimates also indicated that price pressures were becoming more widespread.

Headline inflation is nevertheless projected to decline and settle close to the 3 percent target by 2028.

The central bank said measured increases in the policy rate would help anchor inflation expectations and limit the risk of further second-round effects.

Second-round effects occur when an initial increase in fuel, food or other costs spreads to wages and the prices of a broader range of goods and services.

The BSP acknowledged that economic growth slowed during the first half of 2026.

It maintained that the country’s medium-term growth fundamentals remained intact.

Fiscal measures are expected to support stronger economic activity during the second half of the year.

The Monetary Board said it was prepared to take further policy action when warranted to bring inflation back to the 3 percent target in line with the BSP’s price stability mandate.