Philippines surprises with jumbo interest-rate hike as inflation surges, peso slumps

MANILA – The Philippine central bank delivered an outsized interest-rate hike and signalled readiness to tighten further to rein in resurgent inflation and support a peso that has sunk to a record low.

The Bangko Sentral ng Pilipinas (BSP) increased on Oct 22 the target reverse repurchase rate by a half-point to 5.5% as expected by only one of 25 economists in a Bloomberg News survey. Twenty-four predicted a less aggressive, quarter-point hike.

Broadening price pressures and upside risks to inflation requires a “strong” response, the BSP said in its statement. “Such a decisive response will make monetary policy appropriately restrictive. This will contain second-round effects and firmly anchor inflation expectations.”

“The BSP stands ready to take further monetary policy action as necessary to ensure the timely return of inflation to the target,” it added.

The nation’s benchmark stock index ended 0.7% lower after the decision, snapping five straight days of gains. The Philippine peso continued its decline on Oct 22.

The move underlines how drastically the inflation threat has built up for the Philippines, which must now confront the possibility of a severe El Nino dry spell, while still reeling from the impact of the global oil shock.

The Philippine peso also hit a fresh historic low on Oct 22 after breaching the key psychological level of 63 per US dollar for the first time last week. The weakened currency risks fanning inflation as the nation relies heavily on imports for fuel and food supplies.

The monetary authority has now increased borrowing costs by a total of 125 basis points since the Iran war broke out early in 2026, even as the Philippine economy is growing at its slowest pace since the pandemic. Still, the inflation outlook has hardly improved.

The BSP kept its forecast for 6.1% inflation in 2026, while significantly raising its estimate for 2027 to 6% from 5.4% previously. The gauge is only seen to moderate to 3.3% in 2028.

“The forecasts were worse than we thought,” Governor Eli Remolona said in a news briefing after the decision. “There was a bit of a sense of urgency to try and dampen these inflationary pressures.”

Price pressures are building up as renewed fighting in the Middle East drives up global oil prices, while transport fares have been raised. The biggest risk ahead is a possible severe El Nino dry spell that could hit farm production, according to the governor.

Bank of the Philippine Islands lead economist Emilio Neri Jr, who was the only one to correctly predict the decision, said the jumbo rate hike reinforces the BSP’s inflation-fighting credentials.

Consumer prices already surged 7.2% in September from a year earlier, reversing four months of deceleration. That brought the year-to-date inflation average to 5.4%, well above the central bank’s 3% target.

The governor expressed concern about peso weakness and its impact on imported inflation, even as he said the BSP would not deplete its reserves to defend a specific level of the currency.

He added that domestic economic activity should recover by the first quarter of 2027, supported by improved government spending.

While the central bank has left the door open for more rate hikes, Pantheon Macroeconomics’ Miguel Chanco said further tightening is not a done deal for the BSP’s December meeting.

“Incidentally, today’s larger-than-expected adjustment could’ve been motivated as a front-loading of what would’ve been another uncontroversial 25-basis point hike in the last sit-down of this year,” he said. BLOOMBERG