THE Bangko Sentral ng Pilipinas (BSP) is likely to raise its policy rate by 25 basis points next week as widening inflation risks, a weaker peso and external uncertainties strengthen the case for tighter monetary policy, according to BPI lead economist Emilio S. Neri, Jr.
“We expect the BSP to deliver a 25bp rate hike at next Thursday’s policy meeting, with inflation risks remaining tilted to the upside despite the recent moderation in headline inflation,” Neri said, in a statement.
The next scheduled policy-setting meeting of the BSP Monetary Board for August 2026 is on Aug. 27, 2026.
Neri said inflation pressures are broadening beyond food, with near-term risks concentrated in food and energy.
Adverse weather, including habagat-driven monsoon rains and flooding, could cause further crop damage just as food supply conditions were beginning to stabilize. Elevated domestic fertilizer prices could also raise farm input costs as the planting season approaches.
Neri said the potential onset of a Super El Niño later this year could further disrupt agricultural supply and keep food prices elevated into 2027.
Oil prices also remain volatile as US-Iran talks shift between de-escalation and renewed tensions. Rising producer prices in China could add to imported cost pressures, while the approved wage hike in the National Capital Region could push up labor costs, particularly for labor-intensive services.
Higher labor costs could also trigger second-round effects as businesses pass additional expenses on to consumers, making inflation more persistent, he said.
“Taken together, these risks increase the likelihood of inflation remaining above the BSP’s target range through 2027,” Neri said.
Peso adds to risks
A weaker peso could further complicate the BSP’s inflation outlook by increasing the cost of imported goods, Neri said.
The peso is likely to remain under pressure amid a fluid external environment, while the country’s gross international reserves (GIR) have fallen to $103 billion as of July from $113 billion at the onset of the US-Iran war.
Although reserves remain adequate by traditional measures, the sustained decline points to a gradual erosion of the country’s external buffers, he said.
“Without a rate hike, a faster depletion of GIR from spot-market intervention could add to Peso weakness and further lift inflation expectations,” Neri said.
Credibility over growth
Neri said the BSP’s priority is likely to remain price stability rather than using monetary policy to provide additional support to economic growth.
BSP Gov. Eli Remolona, Jr.’s view that the central bank’s job is “to be credible, not popular” captures the institutional stance likely to guide the Monetary Board’s decision, he said.
Monetary policy can manage cyclical demand but cannot directly address supply-side constraints that are increasingly weighing on the economy.
“Pausing to support growth could risk allowing inflation expectations to become less anchored without addressing the underlying supply constraints,” Neri said.
He said the more durable response lies in structural reforms, including better infrastructure execution, higher agricultural productivity and improved energy security.
A 25-basis-point rate hike would therefore be consistent with the BSP prioritizing price stability while leaving supply-side constraints to fiscal and structural policies.
“Tighter monetary policy to address inflation would therefore reinforce the need for the fiscal side to accelerate reforms, improve spending execution, and tackle bottlenecks that monetary policy cannot resolve,” he said. / KOC
