MONETARY authorities on Thursday raised key interest rates for the first time in more than two years with the inflation outlook having “deteriorated” due to the war in the Middle East.
The 25-basis point hike set the benchmark rate at 4.50 percent while those for overnight deposit and lending rose to 4.0 percent and 5.0 percent, respectively.
“After considering its options, the Monetary Board deemed it necessary to take timely and preemptive policy action to safeguard price stability,” Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said in a briefing.
“The policy rate increase is intended to anchor inflation expectations and contain the buildup of second-round effects,” he added.
Inflation breached the BSP’s 2.0- to 4.0-percent target in March, surging to 4.1 percent from just 2.4 percent in February as energy costs skyrocketed in the wake of the US-Israel war on Iran.
The BSP’s policymaking Monetary Board had decided to keep interest rates unchanged last month during an off-cycle meeting but raised the inflation forecast for this year to 5.1 percent from 3.6 percent. That for 2027 was also raised to 3.8 percent, a return to the target range, from 3.2 percent.
These have now been raised to 6.3 percent for 2026 and 4.3 percent for 2027, both above the 2.0- to 4.0-percent goal.
“The latest BSP projections now indicate a higher inflation path, the central bank said.
“Average headline inflation is seen to breach the 4.0-percent tolerance ceiling in both 2026 and 2027. Inflation expectations have also risen further, heightening the risk of de-anchoring from the target due to more persistent inflationary pressures.”
Remolona said the inflation outlook had “deteriorated” amid the ongoing Middle East conflict.
“Higher oil and fertilizer prices are expected to spill over to food prices and services,” he said, adding that “core inflation is rising, highlighting the risk of demand-driven inflation.”
Easing cycle over
The last time that the central bank raised rates was during an off-cycle hike in October 2023. The policy rate was then kept steady at 6.5 percent until June 2026 and the first rate cut came in August 2024.
Remolona said that future policy decisions would still be “driven by the latest data” but added that “it's fairly safe to say it's [easing cycle] over.”
“In a time of this kind of uncertainty, scenarios are more useful than projections with forecast errors, so we looked very carefully at different scenarios, and one of them would have required a 50-basis point hike,” he said.
“[T]he most reasonable scenario was one in which [we would cut by] 25 basis points today,” he added.
The BSP chief said they would have kept rates steady “if the data can support it, but for now, the way we look at the data, it suggests that the easing cycle is over.”
“[W]e won't make very large moves,” however, Remolona continued. “A measured increase in the policy rate will still accommodate economic recovery over the medium term.”
“Going forward, the Monetary Board will take all necessary actions to ensure inflation returns to the 3.0-percent target,” he said.
“As always, we will be guided by data in pursuing our primary mandate.”
