Despite inflation easing to 6.8 percent in May, economists still expect the Bangko Sentral ng Pilipinas (BSP) to implement further interest rate hikes as spillover effects from the Middle East conflict continue to filter through the broader economy.

Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri Jr. said in a Friday commentary that the BSP should consider more aggressive monetary policy measures, noting that key pass-through effects of the energy shock, particularly transportation fare increases and wage adjustments, have yet to fully materialize.

“The slower inflation print reduces the urgency for an off-cycle rate hike in the near term. However, a substantial increase in the policy rate at the next scheduled meeting may still be warranted,” he said.

“The softer inflation print should be viewed less as an opportunity to delay rate hikes and more as a chance for the BSP to demonstrate its commitment to restoring price stability and counter perceptions that it is behind the curve on inflation,” he added.

The central bank raised interest rates by 25 basis points (bps) on 23 April, citing a deteriorating inflation outlook brought about by the energy shock’s broad impact on fuel prices, as well as fertilizer, food, and transport costs. Higher interest rates reduce liquidity in the economy by encouraging saving over spending, helping curb inflation, although they may also weigh on long-term economic growth.

In May, however, inflation slowed for the first time in three months, easing to 6.8 percent from April’s three-year high of 7.2 percent. The slowdown was driven by government-mandated fuel price rollbacks, relatively stable global oil prices, and lower costs for certain food items, housing, and utilities.

Despite the improvement, Neri cautioned that upside risks to inflation remain significant, particularly if El Niño disrupts agricultural production and pushes food prices higher. He added that the BSP may need to adopt a more forceful policy response given the economic damage caused by persistently elevated inflation and the peso’s continued weakness. The local currency has fallen to record lows 11 times since the escalation of the Middle East conflict.

“Second-round effects have yet to fully materialize, as the absence of fare adjustments and an official increase in the minimum wage has limited the pass-through of higher costs to consumers. Inflation could accelerate further once businesses begin incorporating these additional costs into their pricing,” he said.

“Rate hikes would help support the peso and ensure that any depreciation remains orderly.”

BPI expects the BSP to deliver a 50-basis-point rate hike at its next policy meeting on 18 June.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael Ricafort expects the BSP to raise its key policy rate by as much as 150 basis points by year-end to counter inflationary spillovers and support the peso.

“Thus, BSP policy would still go up further to 5.50%-6.00% (from the current 4.50%) to stay ahead of the curve, as well as to help stabilize the peso exchange rate against the US dollar and contain importation costs,” he said in an advisory.

Ricafort added that tighter monetary policy could help bring inflation closer to the BSP’s target range of 2 to 4 percent.

The central bank’s latest forecast places 2026 inflation at 6.0 percent, while average inflation for the first five months of the year stands at 4.5 percent, both above the BSP’s target range. Neri has also warned that inflation could rise into double-digit territory by the end of the year if the Middle East conflict persists, with no peace agreement reached as of press time.