“DEEPER and more aggressive” rate cuts could be implemented by the Bangko Sentral ng Pilipinas (BSP) if the war in Iran continues and leads to even higher inflation.
The central bank ended an easing cycle last Thursday, raising the policy rate by 25 basis points to 4.5 percent and noting that the inflation outlook had “deteriorated.”
“We now expect an additional 50bp of hikes in 2026, assuming material de-escalation in the US-Iran conflict by the end of 2Q (the second quarter),” ING Economics regional head of research Deepali Bhargava said in a report.
“However, should disruptions persist, and Brent prices remain above USD 100/bbl for most of 2026, a deeper and more aggressive hiking cycle would likely follow,” she added.
The BSP also raised its inflation forecasts to 6.3 percent for 2026 and 4.3 percent for 2027, both above the 2.0- to 4.0-percent target, from 5.1 percent and 3.8 percent.
Consumer price growth surged to 4.1 percent last month — breaching the BSP’s target — from just 2.4 percent in February and is expected to go even higher in April.
“The balance of risks has shifted firmly to the upside,” Bhargava said, noting that oil price increases and geopolitical tensions are likely to spill over into transport costs and broader prices.
She noted that the Philippines, an oil importer, remained particularly vulnerable to global crude price movements that feed directly into domestic inflation.
Bhargava warned that sustained oil price increases could trigger second-round effects, including wage adjustments and costlier goods and services.
The tighter monetary environment is expected to dampen domestic demand, potentially slowing credit growth and investment activity. However, Bhargava said the BSP appeared willing to accept these trade-offs to bring inflation back within target over the medium term.
“The priority is to prevent inflation from becoming more persistent,” she said, as early and decisive action could reduce the need for more aggressive tightening later.
ING noted that the BSP was unlikely to use interest rates primarily to defend the peso, emphasizing instead its core mandate of maintaining price stability.
Citi, meanwhile, also expects the BSP to continue tightening but with a view of supporting economic growth.
At a projected 4.75 percent, the nominal rate will be only about 45 basis points above the BSP’s 2027 inflation forecast of 4.3 percent, it said, below the typical 1.0 to 1.5 percentage-point spread seen in past tightening cycles when domestic demand was stronger.
“In regard to the risk scenario, we think the balance of risks is higher for an additional 25 bps hike in August, compared to a pause after June,” Citi said.
“Indeed, the current inflation forecast can still move (up or down) given the wide range of scenarios on how events in the Middle East can unfold,” it added.
“However, the expectation of a breach in the inflation target, at least for 2026, is well entrenched, in our view.”
While inflation expectations for 2026 already point to a sustained breach of target, Citi said further upward revisions could prompt the BSP to keep tightening.
“We highlight also that an additional hike in August would still leave real policy rates negative for the year as a whole,” it said.
“This suggests that even two more hikes could keep policy appropriately accommodative, in line with the negative output gap and supply-driven nature of the shock.”
Last Friday, BSP Governor Eli Remolona Jr. said that back-to-back rate hikes were likely to prevent rising global oil prices from triggering broader inflation pressures.
“The market needs to understand that we will do what is necessary to contain inflation,” he said in an interview with Bloomberg TV.
“At the moment, that seems like a succession of modest rate hikes.”
Remolona said the Philippine economy would be able to absorb tighter financial conditions, with 2026 growth likely to hit around 4.5-4.6 percent and accelerate to as much as 6.0 percent next year if the oil shock proves temporary.
Growth slowed to 4.4 percent last year from 5.6 percent in 2025, missing the government’s 5.5- to 6.5-percent target due to a massive flood control project scandal.
The corruption mess also prompted economic managers to lower this year’s goal to 5.0-6.0 percent from 6.0-7.0 percent.
