By Katherine K. Chan, Reporter

The Bangko Sentral ng Pilipinas (BSP) delivered a surprise 50-basis-point (bp) rate hike on Thursday and signaled it is prepared to keep tightening amid broadening inflation risks from persistent price shocks and a strengthening El Niño.

The Monetary Board raised the target reverse repurchase (RRP) rate — the BSP's main policy rate, which steers loan and borrowing costs across the economy — by 50 bps to 5.5%, the highest in nearly two years, or since the 5.75% recorded in February 2025. It also matched the benchmark rate set in April 2025. Rates on the overnight deposit and lending facilities were each raised by 50 bps to 5% and 6%, respectively.

"The Monetary Board recognized the need for a strong monetary policy response to broadening price pressures and further upside risks to inflation," the BSP said in a statement on Thursday. "The BSP stands ready to take further monetary policy action as necessary to ensure the timely return of inflation to the target, in keeping with our price stability mandate."

It was the central bank's first 50-bp hike in nearly four years, or since February 2023.

"This decisive adjustment will appropriately tighten monetary conditions in order to contain spillover effects and firmly anchor inflation expectations," BSP Governor Eli M. Remolona, Jr. said at a press briefing. "Meanwhile, domestic economic activity is expected to recover, supported by fiscal measures. This provides some room for the policy adjustment that is needed for us to return to low inflation, the foundation of sustainable growth."

Thursday's move marked the fourth consecutive meeting at which the BSP tightened policy, bringing cumulative increases to 125 bps since April. Only two of the 22 analysts polled by BusinessWorld predicted the 50-bp hike, while 20 had penciled in a quarter-point move.

Mr. Remolona said the decision to raise by 50 bps was a "strong majority" within the Monetary Board, driven by concern that policymakers were falling behind the curve.

"I think, clearly, we wouldn't be doing 50 (bps) if we didn't think we were kind of behind the curve. But fortunately, we only need 50 (bps) for now," he said.

He added that the Board discussed an off-cycle hike but opted against it to avoid signaling to markets that the economic situation is too dire.

Inflation Risks Intensify

The central bank has said inflation risks have intensified after the reignited Middle East war drove global oil prices higher, with recent transport fare hikes and potential supply disruptions from El Niño adding to the pressure.

"The forecasts were worse than we thought. There was a bit of a sense of urgency to try and dampen these inflationary pressures," Mr. Remolona said.

The BSP kept its inflation forecast at 6.1% for this year but raised its 2027 projection to 6% from 5.4% previously. Its 2028 estimate was held at 3.3%.

"So, similar to headline inflation, the outlook now is that the core inflation may continue to increase over the next few months and even, perhaps, (in) the early months of 2027," BSP Deputy Governor Zeno Ronald R. Abenoja said.

Headline inflation returned to this year's peak of 7.2% in September amid renewed price surges in oil, food, housing, and utilities. It was the seventh consecutive month inflation ran above the BSP's 3% target, the midpoint of its 2%-to-4% tolerance band, with the year-to-date average standing at 5.4%. Core inflation, which strips out volatile food and fuel prices, accelerated to a nearly three-year high of 4.7%.

Mr. Remolona said El Niño remains the top inflation risk, while Mr. Abenoja added that the extreme weather event could hurt rice production and push food prices higher.

"We think there's a modest El Niño that we hope will happen. There is going to be El Niño. We're almost sure of that… (But) 'Godzilla El Niño,' that El Niño will be pretty bad for prices," Mr. Remolona said.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration said on Wednesday that a strong to very strong El Niño is active in the Tropical Pacific. It is expected to peak before the year ends and last until the first quarter of 2027.

Peso at Record Low

The governor also said the central bank is concerned that the peso's recent depreciation may prove inflationary. He noted, however, that the BSP does not tighten to support the currency, and its foreign exchange intervention remains limited to smoothing out sharp swings. A weaker peso makes dollar-priced imports, including fuel, costlier in peso terms — one of the channels through which currency swings can feed into consumer prices.

On Thursday, the peso fell by 15.9 centavos to a new all-time low of P63.52 against the dollar, breaking the previous record finish of P63.361 logged on Wednesday.

Further Tightening

Mr. Remolona said the economy is expected to recover by the first quarter of next year on the back of fiscal measures, giving the central bank additional room to tighten.

"We expect fiscal spending to rise. And then with that, sentiment will improve and investment will go up. And inflation, if inflation comes down, sentiment will also improve. Then that will help the recovery," he said.

He left the door open to further tightening but said he hopes more outsized hikes will not be necessary.

"I would say we remain open to further interest rate hikes. I can't say whether it will be 50 (bps) or 25 (bps) 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."

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr., who correctly predicted a 50-bp hike for Thursday's meeting, said the move was appropriate and expects more tightening to come.

"We see the possibility of another rate hike in December, potentially at least 25 basis points," he said in a commentary. "Further tightening in the first quarter of 2027 remains possible depending on the inflationary impact of El Niño. Should weather disruptions prove more severe than expected, the tightening cycle could extend into the first half of next year."

The Monetary Board will hold its final meeting of the year on Dec. 17.

Capital Economics Deputy Chief Emerging Markets Economist Jason Tuvey, meanwhile, sees lower odds of further tightening if oil prices ease.

"The BSP hiked interest rates today by a larger-than-expected 50 bps, to 5.5%, but so long as energy prices stabilize and drop back from early next year as we assume, further monetary tightening is unlikely," he said in a commentary. However, he added that persistently high fuel costs and potentially faster food inflation could prompt the BSP to raise its key rate by up to two more times.

"That said, if energy prices remain elevated into next year and El Niño adds further upward pressure to food inflation, the BSP is likely to keep rates high for longer than we currently anticipate or even deliver one or two more hikes," he said.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said another quarter-point hike in December is "not a done deal," adding that the BSP could start easing by the middle of next year.

"Our base case is that the Board will eventually find itself in a position to start unwinding this year's hikes by the middle of 2027, especially if we're right about GDP growth remaining below par for the foreseeable future," he said in an e-mail. "The Board is flimsily hanging its hat on 'fiscal measures' to support a recovery in domestic activity, which we think is a tough ask, given the overbearing weight of weak consumption and investment."

BMI Asia Country Risk Analyst Brandon Ong said he expects another 25-bp hike in December to bring the policy rate to 5.75%.

"But the risk of another hike as early as February is rising. What some forecasters are calling a Godzilla El Niño could cause unprecedented crop disruptions and keep food prices elevated for longer, just as energy costs stayed high in a prolonged US-Iran conflict," he said in a webinar on Thursday. "As one of the region's most inflation sensitive banks, the BSP will not hesitate to hike beyond our base case if inflation expectations start to trip."

BMI now expects the Philippine economy to grow by 4.5% in 2027, down from its previous forecast of 4.9%, as higher inflation weighs on household spending while more intense El Niño spillovers and tighter monetary policy dampen activity.

"Higher energy prices are already battering the economy this year, and with the El Niño hit likely to land in 2027, that pressure will likely carry on until next year," Mr. Ong said. "One silver lining is that public investments should pick up in 2027 from a low base this year, helping the Philippines emerge as one of the region's faster growing economies."

— with Justine Irish D. Tabile