DESPITE weaker-than-expected growth, the central bank has the space it needs to bring inflation back to where it should be, according to HSBC’s Senior Asean Economist Aris Dacanay.
As such, Dacanay said in a report on Thursday: ‘We expect the Bangko Sentral ng Pilipinas (BSP) to tighten its monetary reins further by 25bp [basis points] in each of its two remaining rate-setting meetings this year, bringing the policy rate to 5.50 percent by year-end.
Dacanay said the bank expects the BSP to tighten further next week by 25 basis points to 5 percent as a ‘signal to the economy’ that the central bank is on top of inflation.
The HSBC’s Senior Asean Economist said this is in response to the second quarter 2026 BSP sentiment surveys published in July, which show 12-month-ahead inflation expectations of consumers rising to 9 percent, while it rises to 5.6 percent for businesses.
Too early to declare victory over inflation
While data shows there is ‘less urgency’ to tighten monetary policy aggressively, Dacanay said: ‘We think it’s still too early to declare victory over inflation.’
‘Risks to inflation are still heavily skewed towards the upside,’ added the HSBC officer.
For one, he emphasized that renewed tensions in the Middle East have brought back oil prices to above $90 per barrel, while ‘the worst of El Niño has yet to arrive.’
‘Though the effects of El Niño will likely be felt in the fourth quarter of this year, retail rice and vegetable prices have picked up, even as global rice prices have already dipped. The only component keeping food inflation down is a sizeable drop in pork prices, driven by an ongoing global supply glut,’ said Dacanay.
Still, he said the largest inflation risk to consider is the minimum wage hike in Metro Manila.
‘The 12-percent wage hike in the capital-the highest in two-decades-risks setting a precedent for other regions. If other regions follow suit, we estimate inflation could rise by more than a percentage point,’ added Dacanay.
All in all, the bank’s Senior Asean Economist said: ‘High and sticky inflation cannot be confidently ruled out, which we think will keep the BSP’s foot gently rested on the monetary brakes, at the very least.’
FX risks
Apart from inflation, he also took into account risks tied to the USD-PHP exchange rate, which hit an all-time weakest intraday level of P61.995 on Thursday, nearly touching the P62-per-dollar level.
‘The BSP could, therefore, help stabilize the peso by building a buffer against potential Fed action through rate hikes,’ said Dacanay.
This, he added, would be helpful since the spready between the BSP and Fed policy rates, in real terms, is ‘currently minimal. if not flat.’
‘After all, it seems liquidity conditions in the economy (based on excess liquidity) have been marginally tightening due to the BSP’s recent interventions in the FX market,’ the economist said.
‘A rate hike can, therefore, deliver a similar outcome, without having to dip into the central bank’s reserves,’ he also noted.
How far can the BSP go?
Dacanay underscored the need to get a ‘sense’ of what the ceiling is in monetary tightening.
‘Of course,the BSP wouldn’t want to tighten the monetary reins more than necessary. That said, we think the BSP has room to tighten beyond next week’s meeting if it needs to,’ added Dacanay.
Dacanay cited the stable asset quality as one of the factors that could give the central bank enough room to tighten.
‘Non-performing loan ratios for universal banks and consumer loans have remained steady,’ Dacanay said, adding that even the ratio of loans being restructured to total loans issued has remained ‘flat.’
Moreover, he said financial risk ‘seems manageable’ so far.
‘Although interbank lending has fallen lately, the spread between the interbank lending rate and the safest short-term asset (in this case, local 3-month T-bills) has been stable,’ said Dacanay.
This suggests, he said, that banks’ risk aversion hasn’t increased despite slower economic growth.
As a result, Dacanay pointed out that loans to both businesses and households, while softening, continue to grow.
‘And they are growing much faster than nominal GDP growth, suggesting that leverage in the economy continues to build,’ he explained.
One indicator, however, is worth watching: the banking system’s capital adequacy ratio (CAR), which he said has deteriorated by 0.9 percentage point from the start of the year to March due to losses in local bond values.
‘This helps explain why the BSP opened a relief scheme for banks, allowing unrealized losses on peso-denominated government bonds to be excluded from regulatory capital calculations,’ said Dacanay.
Nevertheless, he said at 15.6 percent, the CAR remains ‘well above’ the BSP’s mandated threshold of 10 percent and can therefore absorb a few more rate hikes, he also noted.
‘Though an exact ceiling for monetary tightening may be hard to pin down, we think the BSP can go beyond than just a ‘one and done’ next week,’ said Dacanay.
The Monetary Board, the highest policymaking body of the BSP, is set to hold its fourth scheduled rate-setting meeting on August 27,2026.
The BSP has raised the key interest rate by a total of 50 basis points since the start of the conflict in the Middle East on February 28, delivering two separate quarter-point rate hikes at the Monetary Board’s rate-setting meetings held on April 23 and June 18.
At the Development Budget Coordination Committee (DBCC) briefing before the House Committee on Appropriations on Monday, BSP Governor Eli M. Remolona Jr. said: ‘The Monetary Board will meet next week to decide the next policy action. We are prepared to take further steps as necessary to ensure that inflation returns to target.’
The target of the BSP remains at 3-percentage average inflation plus or minus 1 percentage point tolerance range.