A quarter-point rate hike looms as inflation risks ‘broaden’ and policy credibility takes priority, according to Bank of the Philippine Islands’ (BPI) Lead Economist.
In a commentary he wrote, BPI Senior Vice President and Lead Economist Emilio S. Neri Jr. said the lender expects the Bangko Sentral ng Pilipinas (BSP) to deliver a 25-basis point rate hike at next Thursday’s policy meeting, with inflation risks remaining ’tilted to the upside’ despite the recent moderation in headline inflation.
According to Neri, adverse weather remains a ‘key concern,’ with habagat-driven monsoon rains and flooding raising the risk of further crop damage just as food supply conditions were beginning to stabilize.
‘Elevated domestic fertilizer prices could further add to farm input costs as the planting season gets underway in the coming months,’ Neri said in the commentary issued last Thursday.
Looking ahead, he said the potential onset of a Super El Niño in the latter part of the year could ‘compound’ agricultural supply disruptions and keep food prices elevated into 2027.
During the Development Budget Coordination Committee (DBCC) briefing last Monday, BSP Deputy Governor Zeno Ronald R. Abenoja said the central bank will update its inflation forecasts in accordance with the ‘risk factors’ that it is currently tracking.
‘One of them is the price of crude oil in the international market. Second, the potential effect of El Niño which the peak impact will be experienced in the fourth quarter of 2026 until the first half of 2027,’ added Abenoja.
In his commentary four days later, Neri wrote that oil prices remain ‘volatile’ as US-Iran talks swing between de-escalation and renewed tensions, while rising producer prices in China add another channel for imported cost pressures.
Further, he said the approved NCR wage hike, once implemented, would add to domestic inflation pressures by raising labor costs, particularly in labor-intensive services.
‘Beyond the direct impact on prices, potential second-round effects could make inflation more persistent as businesses pass higher labor costs through to consumers,’ Neri added.
Taken together, he said these risks increase the likelihood of inflation lingering above the central bank’s target range through 2027.
APART from domestic inflation woes, Neri said a sharper depreciation in the local currency ‘would amplify’ imported inflation, which may require tighter policy even if the underlying shock remains ‘largely supply-driven.’
He cited that the country’s gross international reserves (GIR) have ‘declined significantly’ to $103 billion as of July, from $113 billion at the onset of the US-Iran war in late February.
While reserves remain ‘adequate by traditional metrics,’ Neri emphasized that ‘the sustained drawdown points to a gradual erosion of the Philippines’ external buffers.’
‘Without a rate hike, a faster depletion of GIR from spot-market intervention could add to Peso weakness and further lift inflation expectations,’ he stressed.
Within the trading session on Wednesday, the Philippine peso hit its all-time weakest intraday level of 61.995 but recovered as it closed at 61.815 against the dollar, data from the Bankers Association of the Philippines (BAP) showed. (See: https://businessmirror.com.ph/2026/08/19/rate-hike-may-be-good-defense-for-philippine-peso/)
Monetary policy
NERI also emphasized that monetary authorities staying their hands in an effort to support growth could risk allowing inflation expectations to become less anchored without addressing the underlying supply constraints.’
He said monetary policy can manage cyclical demand but cannot address constraints on potential output, hence leaving ‘limited scope’ for lower rates to offset a ‘predominantly’ supply-driven shock.
Neri explained further that the ‘binding constraint’ on Philippine growth is increasingly structural rather than cyclical, with governance challenges also weighing on economic activity, something monetary policy cannot remedy.
‘The more durable solution lies in advancing reforms across government, from infrastructure execution and agricultural productivity to energy security,’ said Neri.
A 25-basis-point hike, he said, would therefore be ‘consistent’ with the Monetary Board prioritizing price stability while ‘leaving the burden of addressing supply-side constraints where it belongs: with structural and fiscal policy.’
As such, Neri said tighter monetary policy to address inflation would therefore ‘reinforce’ the need for the fiscal side to accelerate reforms, improve spending execution, and tackle bottlenecks that monetary policy cannot resolve.