BPI sees two more BSP hikes in 2026

The Bank of the Philippine Islands (BPI) expects the Bangko Sentral ng Pilipinas (BSP) to deliver two more rate hikes at the Monetary Board’s final two meetings of 2026 as headline inflation ended four consecutive months of easing, accelerating to another three-year high of 7.2 percent in September.

In a Tuesday commentary, BPI lead economist Emilio Neri Jr. said the acceleration strengthens the case for the central bank to continue raising interest rates, as the onset of a severe El Niño season toward the end of the year compounds the lingering effects of the Middle East oil shock.

“We expect a 25 bp rate hike in October followed by another one in December, which will bring the policy rate to 5.50 percent by year-end,” Neri said.

“Additional rate hikes during the first half of 2027 remain possible, with the policy rate potentially reaching 6.00 percent depending on the extent of El Niño’s impact on inflation,” he added.

The Philippine Statistics Authority on Tuesday said the 7.2 percent September print was primarily driven by elevated food, transport and energy costs, as well as adverse weather effects from the habagat rains.

Neri said the September rate suggests that inflationary pressures remain “deeply embedded” in the economy, with the broader inflation outlook also appearing less favorable as second-round effects from the energy shock begin to manifest.

Cushioning the impact

He noted that the recent implementation of fare and wage hikes by the state to cushion the impact of the conflict on lower-income groups may add further pressure to headline inflation in the coming months, with the onset of the El Niño season posing the largest risk.

“Unlike fuel prices, which can reverse relatively quickly as global conditions change, fare increases and wage adjustments tend to be more persistent, making inflation more difficult to unwind,” Neri said.

“Rice remains among the most vulnerable commodities given its sensitivity to weather conditions. Should the impact of El Niño prove more severe than currently expected, inflation could rise toward 8 percent in the coming months.”

The BSP’s last hike in August was described by Governor Eli Remolona Jr. as a “preemptive” move in light of the upcoming El Niño season and minimum wage adjustments in the capital region.

BSP to tighten as much as necessary

Remolona has said that the BSP will continue to “tighten as much as necessary” to bring inflation back to its annual 3 percent target, which the central bank predicts to be exceeded over the next three years.

Neri noted that a larger, 50 basis point hike may be possible in the coming months, depending on global and domestic macroeconomic conditions.

“If the pace of peso depreciation accelerates again due to higher oil prices, widening external imbalances, or a more hawkish Federal Reserve, the BSP may consider a more aggressive policy response to maintain price stability,” he said.