IMF, ADB expect BSP to keep tightening

The International Monetary Fund (IMF) and Asian Development Bank (ADB) expect the Bangko Sentral ng Pilipinas (BSP) to maintain its monetary policy tightening bias as the conflict in the Middle East wages on, bringing inflationary pressures that may compound adverse weather effects beginning in the latter part of 2026.

In separate press briefings this week, both institutions said their respective baselines assume the BSP will continue hiking interest rates in the near term.

“We project the BSP to continue tightening at a gradual pace,” ADB Principal Economics Officer Teresa Mendoza said at a Wednesday press conference. “Monetary policy [is] a delicate trade-off actually between balancing growth, and also anchoring inflation expectations.”

Meanwhile, IMF Research Department Chief of the Commodities Unit Andrea Pescatori said Friday that the IMF expects at least another 25-basis-point hike in either of the central bank’s final two meetings of the year.

“In our baseline, we have an extra 25 basis points increase by the BSP, and this is quite a [market-wide] expectation,” he said.

“This is predicated on the fact that the current increase in rice prices, which have a sharp and fast pass-through effect, will [result in higher] inflation that will probably show up in the next phase, especially for the fall,” added Pescatori.

The BSP has hiked interest rates by a cumulative 75 basis points over the Monetary Board’s last three meetings in April, June and August, mostly in response to headline inflation accelerating roughly seven times above its end-2025 level following the onset of the global energy shock.

Its latest hike in August came amid persistent upside risks to inflation beyond developments in the Middle East, which BSP Governor Eli Remolona Jr. described as a “preemptive” move.

“Posing further risks to inflation is the possible impact of a severe El Niño event and potential minimum wage adjustments. These underlying price pressures require preemptive monetary action,” he said.

Economists have noted that the onset of an extreme El Niño season toward the latter half of this year may result in higher food inflation due to crop damage, while the approved P85 minimum wage hike in Metro Manila, which took effect on Saturday, 26 September, is further clouding the inflation outlook.

Pescatori specifically noted the potential damage a severe El Niño event may pose, particularly to rice prices, which accelerated to 19.4 percent in August from 17.1 percent in July.

“There are obviously downside risks also to the agricultural sector, and the rice output, which can have an effect on GDP [gross domestic product],” he said, noting the IMF expects a 25 percent increase in rice prices under a severe El Niño event.

The BSP has said rate hikes often take at least a year to fully transmit into the economy, which Mendoza said should be fully integrated by the time next year rolls around.

“A key consideration also for next year going forward, 2027, is we also have to get the 75 basis point work through, again, transmit to the economy,” she said.

“So it will really be what you call this largely data-dependent, look at foreign inflation trends, but we see at least for this year, it will remain tight,” she added.

Remolona maintained the central bank’s hawkish stance, reaffirming that the BSP will “tighten as much as we need” to bring the headline print back to its annual 3 percent target, which it sees breaching for the next three years as spillover effects from the Gulf oil shock continue to manifest.

The Monetary Board’s next meeting is scheduled for 22 October. Both ADB and IMF expect headline inflation to exceed the BSP’s annual target this year.