Inflation expectations anchored
“With this policy action, we can help keep inflation expectations anchored and mitigate the risk of second-round effects,” BSP Governor and Monetary Board chairman Eli M. Remolona Jr. said.
“We are prepared to take further monetary action to ensure inflation returns to the 3 percent target,” he added.
The BSP’s key policy rate now stands at 4.75 percent. Interest rates on the overnight deposit and lending facilities were likewise adjusted to 4.25 percent and 5.25 percent, respectively.
The central bank last raised rates by 25 basis points on April 23, citing a deteriorating inflation outlook driven by the energy shock’s impact on fuel, fertilizer, food and transport costs.
Inflation up 4.1% in May
Government-mandated fuel price rollbacks and easing geopolitical tensions helped slow inflation to 6.8 percent in May from April’s three-year high. Remolona noted, however, that core inflation — which excludes volatile food and energy prices — accelerated to 4.1 percent in May.
Earlier on Thursday, the United States and Iran signed a memorandum of understanding aimed at advancing a broader peace agreement, including provisions to keep the Strait of Hormuz open for at least 60 days.
Despite the development, economists warn that second-round effects from the energy shock, particularly higher transport fares and wage adjustments, have yet to fully materialize.
Remolona acknowledged the difficult tradeoff facing policymakers, as higher interest rates help curb inflation but can also weigh on economic growth.
Hardest hit by the oil price shock
“Central banks around the world have found this whole thing challenging. In our case, we’re one of the hardest hit by the oil price shock,” he said. “Even if the Strait of Hormuz is open today, even if there’s a ceasefire today, we will still need several months to rebuild the infrastructure before we can expect the price of oil to return to pre-conflict levels.
The BSP now expects headline inflation to remain above its 2- to 4-percent target range this year and next before easing to 3.1 percent in 2028, slightly above its 3 percent target.
“Our projection based on today’s move is that we return to target in 2028, so it’s going to take a while. But we think that’s a reliable path toward the target based on what we’re seeing,” Remolona said.
