By Katherine K. Chan, Reporter

The Bangko Sentral ng Pilipinas (BSP) tightened monetary policy for a third consecutive meeting on Thursday, keeping the door open to further hikes as inflationary pressures loom while medium-term growth prospects remain solid.

The Monetary Board raised the target reverse repurchase rate by 25 basis points (bps) to 5% — the highest level in more than a year, or since the 5.25% seen in June 2025. The move also matched the benchmark rate set in August 2025. Rates on the overnight deposit and lending facilities were likewise lifted by 25 bps each, to 4.5% and 5.5%, respectively.

The reverse repurchase rate is the benchmark from which banks price loans, so the increase feeds through to borrowing costs for businesses and households, including loans tied to prevailing market rates.

The decision was in line with market consensus, as 19 of the 24 analysts polled by BusinessWorld had penciled in another hike.

The BSP said underlying inflation risks from volatile oil prices, the looming “Super El Niño,” and a potential wage hike justified additional preemptive tightening.

“The measured increases in the policy rate will continue to anchor inflation expectations and mitigate the risk of further second-round effects,” the central bank said in a statement. “Despite slow growth in the first half of 2026, the fundamentals for growth appear to be intact over the medium term. With the support of fiscal measures, growth is expected to strengthen in the second half of the year.”

Thursday’s action marked the third straight 25-bp hike, following separate increases in April and June. The BSP has now raised rates by a cumulative 75 bps since it began its tightening cycle in April amid inflationary pressures from the Middle East war-driven energy shock.

BSP Governor Eli M. Remolona, Jr. said on Thursday that policymakers hope they will not need to hike again in coming meetings, but remain open to further tightening to ensure inflation returns near the 3% target.

“We will tighten as much as we need to bring the inflation rate down to its target,” he said during a briefing.

Inflation Outlook

The BSP now projects headline inflation to settle at 6.1% this year, slower than its earlier estimate of 6.4%. According to BSP Department of Economic Research Director Lara Romina E. Ganapin, the headline print will likely peak in the fourth quarter of this year before easing back into the tolerance range by the fourth quarter of 2027.

The government’s inflation target is 2%-4%, making the projected 6.1% pace well above the band and underscoring why the central bank has stayed in tightening mode even as growth slows.

For 2027, however, the BSP raised its inflation forecast to 5.4% from 4.5%, citing a potential wage hike and the looming “Super El Niño.”

The Philippine Atmospheric, Geophysical and Astronomical Services Administration said the country may encounter a “strong” El Niño season from September to November, which could intensify into a “very strong” one between October and January next year.

Ms. Ganapin noted that El Niño-driven inflation could manifest through lower rice output and higher import prices. Rice is a staple of the Filipino diet and a heavily weighted item in the consumer price basket, which is why disruptions to its supply have historically translated quickly into headline inflation. According to the Department of Agriculture, the “Super El Niño” event is projected to slash agricultural output by 20%-30%, as high temperatures take a toll on local crops, livestock, fisheries and aquaculture.

“Today’s rate hike is a preemptive move because of the risks that we anticipate, including the risk of an El Niño event on food prices and the risk of further minimum wage increases,” Mr. Remolona said.

While volatile global oil prices remain a key inflation risk, the BSP chief said concerns over El Niño and wage hikes now carry heavier weight in the central bank’s inflation outlook.

The dual-tranche P85 minimum wage hike in Metro Manila was suspended after a Pasig City Regional Trial Court issued a 20-day temporary restraining order on its implementation. The first tranche of P60 was imposed on July 25, while the second tranche of P25 was set to take effect on Jan. 20 next year.

For 2028, the BSP sees inflation returning near its target at 3.3%, although faster than its earlier estimate of 3.1%.

Growth

The central bank’s hawkish stance also reflects expectations that domestic growth will rebound by the fourth quarter, with a full recovery underway next year.

“We expect that growth will recover by the fourth quarter of 2026,” Mr. Remolona said. “The fundamentals for growth are still in place. Once growth gets going, we will get going. We think growth will more or less fully recover by next year.”

The Philippine economy grew at a post-pandemic low of 2.3% in the second quarter, bringing first-half growth to 2.6%. Growth took a major hit from the lingering effects of the flood control mess on investments and public construction. Household spending, the economy’s largest driver, also weakened further as Middle East war shocks stoked domestic prices.

The slowing economy illustrates the policy dilemma facing the BSP: tightening further risks weighing on an already weak recovery, while underreacting risks letting inflation expectations drift away from target.

Mr. Remolona said the BSP could hit pause once policymakers are “confident that the inflation rate will move towards the target of 3%.”

Analyst Reactions

Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, said the BSP’s third straight rate increase was “more of a risk-management move.”

“Today’s 5% rate is defensible, but it could be regarded as the upper end of what the BSP should do under the current circumstances,” he said via Facebook.

For Mr. Peña-Reyes, who had expected a pause at the August meeting, the central bank could stand pat for the rest of the year if inflation expectations stabilize and the energy shock weakens. He added that monetary authorities should closely watch core inflation, the movement of the peso and oil prices, as well as broader domestic growth in deciding the next policy moves.

“Moreover, the growth side deserves increasing attention,” Mr. Peña-Reyes said. “With GDP already growing only 2.3% in Q2, the cost of another aggressive tightening cycle could become greater than the marginal inflation benefit.”

Meanwhile, Metropolitan Bank & Trust Co. Chief Economist Nicholas Antonio T. Mapa sees the central bank maintaining its measured tightening approach to avoid further dampening growth.

“BSP pushed back on overzealous aggressive rate hikes so (it) looks like they’ll stick to measures tightening,” he said in a Viber message. “Continued tightening will cap growth momentum further which is why BSP opted to tighten but refrain from deploying a more punchy 50-bp increase.”

On the other hand, ANZ Research said the BSP may hold to a “wait-and-see” stance in October before tightening anew in December as El Niño-driven inflation risks emerge.

“As inflation has moderated in (the) last two months, we expect the BSP will likely adopt a wait-and-see approach in the next policy meeting in October,” ANZ Foreign Exchange Analyst Kausani Basak and Chief Economist for Southeast Asia and India Sanjay Mathur said.

“However, the real policy rate remains in the accommodative zone, providing the BSP with adequate policy space for further rate hikes in case of upside risk to inflation. We expect the BSP to implement a hike in December in response to El Niño related price rises taking the policy rate to 5.25% by yearend,” they added.

The Monetary Board will hold its last two rate-setting meetings of the year on Oct. 22 and Dec. 17.