BSP tightening cycle likely not over — BPI

The Bangko Sentral ng Pilipinas’ (BSP) tightening cycle is far from over despite its recent unprecedented 50-basis-point “jumbo” rate hike, with another increase possible in December, according to Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr.

Neri, in a statement, said the BSP’s decision to raise its key policy rate to 5.50 percent was timely and sent a decisive message that the central bank remains committed to bringing headline inflation back to its 3 percent annual target.

“In our view, the larger rate hike was timely and appropriate given the increasingly challenging inflation environment. It sends a strong message that the BSP remains committed to price stability, which should help in managing inflation expectations,” he said.

The BSP cited a worsening inflation outlook, projecting average inflation of about 6.1 percent this year and 6 percent next year.

Neri, one of the few economists who predicted the jumbo hike, said September’s headline inflation rate of 7.2 percent, a three-year high, suggests the BSP’s tightening cycle is not over.

He added that BPI sees another rate hike at the central bank’s final monetary policy meeting in December, with tightening possibly continuing into next year.

“Despite the sizeable adjustment, the tightening cycle is likely not over. Inflation is expected to remain elevated in the coming months, with El Niño adding to price pressures,” he said.

“We see the possibility of another rate hike in December, potentially at least 25 basis points. Further tightening in the first quarter of 2027 remains possible depending on the inflationary impact of El Niño,” Neri added.

BSP Governor Eli Remolona Jr. also left the door open to further rate hikes on Thursday, citing uncertainty over the impact of El Niño and lingering oil supply constraints stemming from the Gulf conflict.

“I would say we remain open to further interest rate hikes. I can’t say whether it will be 50 or 25 or bigger,” he said.

“You might remember that in 2022 we did 75 and then 50 and 50. I hope we don’t need to do that.”

Remolona earlier said that monetary policy typically operates with a lag, taking about a year to fully manifest.

Neri added that an expected rebound in gross domestic product growth in the third and fourth quarters, supported by increased government spending, could give the BSP more room to raise rates.

“Despite the drag from inflation, GDP growth is expected to improve in the second half of the year, supported by favorable base effects and a potential recovery in government spending,” he said.