Full Breakdown
Philippine Central Bank Raises Policy Rate by 50 Basis Points to 5.5%
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Core Policy Move
On Thursday the Bangko Sentral ng Pilipinas (BSP) increased its target reverse-repurchase rate by 50 basis points, bringing the benchmark to 5.5%. This marks the fourth consecutive tightening cycle and the first half-point hike in nearly four years. The move was larger than the 25-basis-point increase anticipated by market forecasts.
Inflation Pressures and Economic Context
September consumer-price inflation surged to 7.2% year-on-year, reversing a four-month slowdown and pushing the year-to-date average to 5.4%, well above the BSP’s 3% target. Core inflation, which excludes volatile food and fuel items, rose to 4.7%, a near three-year high. The BSP kept its 2024 inflation outlook at 6.1% but raised the 2027 projection from 5.4% to 6.0% and expects inflation to fall to 3.3% by 2028.
Real-economy indicators remain weak. Gross domestic product grew only 2.3% year-on-year in the second quarter, the slowest pace since 2021, and the first-half expansion slowed to 2.6%. The slowdown reflects a slump in construction, softening domestic demand, and higher prices for rice, electricity, fuel and transportation. The national government is targeting 3.5%-4.5% growth for the year.
Monetary Authority’s Rationale
The BSP’s Monetary Board stated that expanding price pressures and heightened upside risks required a “strong” policy response. It argued that a more restrictive stance would curb second-round effects, anchor inflation expectations, and keep monetary policy at an appropriate degree of tightening. The board also indicated readiness to implement further measures if needed.
Market Reaction and Economic Outlook
Analysts had broadly expected a modest 25-basis-point hike; a Reuters poll of 27 economists and a BusinessWorld survey of 22 analysts both projected a quarter-point increase. The larger move pushed cumulative tightening since April beyond the previously assumed 100 basis points, underscoring the BSP’s resolve to contain inflation.
The Philippine peso has depreciated nearly 10% since the onset of the Middle-East conflict that lifted global oil prices, breaching the 63 per US dollar level and creating additional import-price pressures for the fuel-import-dependent economy.
Outlook and Potential Risks
While the BSP signals willingness to tighten further, the balance between curbing inflation and supporting a sluggish economy remains delicate. Continued currency weakness and external shocks, such as persistent oil price volatility, could sustain inflationary pressures, prompting additional policy adjustments.