The Monetary Board raised its key interest rate by 25 basis points for the third time in a row, this time as a ‘preemptive move’ against the threat of El Niño which could worsen in the fourth quarter and drive up food prices.
Aside from the El Niño event, the Monetary Board, the highest policy-making body of the Bangko Sentral ng Pilipinas (BSP), said it also took into account the risk of further wage increases in its policy action.
The policy move of the MB on Thursday brought the BSP’s Target Reverse Repurchase (RRP) Rate to 5 percent. The interest rates on the overnight deposit and lending facilities were adjusted to 4.5 percent and 5.5 percent, respectively.
During the monetary policy meeting, BSP Governor Eli M. Remolona Jr., who also serves as the chairman of the Monetary Board, said: ‘It’s true headline inflation has eased. However, core inflation remains above the tolerance range reflecting second-round effects.’
‘At the same time, oil prices remain volatile. Posing further risks to inflation is the possible impact of a severe El Niño event and potential minimum wage adjustments,’ added Remolona.
These underlying pressures, the central bank chief emphasized, require ‘preemptive monetary action.’
Remolona explained that while volatile oil prices remain a risk to inflation, ‘The other risks are bigger.’
‘We’re even looking beyond just the oil prices, which have been going up and down. We’re looking at other factors as well. They’ve become more prominent than before,’ added the BSP governor.
Revised inflation forecasts
While the Monetary Board opted for a preemptive policy move during its August 27 rate-setting meeting, it revised downwards its inflation forecast for 2026 to 6.1 percent from its 6.4 percent forecast during its June 18 policy meeting.
However, it raised its inflation forecast to 5.4 percent for 2027, compared to its 4.5 percent forecast last June 18.
BSP Assistant Governor for Monetary Policy Sub-Sector Rogelio V. Mercado Jr. said: ‘The 6.1 percent inflation is of course driven by lower-than-expected inflation in June and July, as well as declining oil prices. This would be partly offset by the impact of El Niño on rice prices in the fourth quarter.’
‘For 2027, our inflation forecast is now at 5.4 percent. This is up from 4.5 percent, and it will be driven by the impact of severe El Niño on rice prices, as well as the impact of higher minimum wage increase.’
For 2028, Mercado said the latest central forecast is that inflation will return to around 3.3 percent, which is close to the central bank’s target and within the tolerance band.
Severity of El Niño
With a lower inflation forecast for 2026, however, Mercado said the central bank is still looking into a ‘possible large risk that can come in towards the end of the year.’
‘In particular, of course, we have El Niño, which is projected to be quite severe. And the peak of the severity of El Niño will happen towards, in fact, the fourth quarter of the year,’ added Mercado.
On the El Niño assumption, BSP Department of Economic Research Director Lara Ganapin said in the central scenario, the BSP is looking at a strong El Niño episode.
‘So, we look at two channels in terms of the impact on rice output. If rice output would go down, then there would be some pressure on domestic rice prices,’ Ganapin said.
The other channel, she explained, is in terms of higher import prices because other countries are also affected by El Niño.
‘So, if there’s pressure on global rice prices, then that could also have some impact on the domestic prices,’ added Ganapin.
Wage increase
Another inflation risk flagged by the central bank is the potential wage adjustment which also warrants ‘close monitoring,’ including their implications for broader price setting and second-round effects.
Remolona said the BSP was ‘somewhat surprised’ at the 12-percent increase in the daily minimum wage in the National Capital Region (NCR).
‘In situations like this, we do scenarios. One scenario is everybody will follow NCR. So everybody will do 12 percent, all the different regions. And then we look at the possibility that maybe it will be mainly Metro Manila and not the others,’ said Remolona.
The BSP governor noted that while the central bank weighs these possibilities, nonetheless, for most scenarios, ‘We think it will be a significant inflationary factor.’
The BSP’s annual minimum wage increase assumption for 2026 was way below the actual minimum wage hike or the P85 approved by the NCR wage board for this year.
‘The assumed annual minimum wage increase is 6.7 percent for 2026, in line with the previous year’s wage adjustment in the National Capital Region,’ BSP said in its Monetary Policy Report.
The P85 approved by the NCR wage board is equivalent to a 12.23-percent increase.
Looking ahead, Remolona said: ‘We’re hoping that we won’t need another rate hike.’
Still, the BSP governor said: ‘We will tighten as much as we need to, to bring the inflation rate down to its target.’
‘The Monetary Board is prepared to take monetary policy action as warranted to ensure that inflation returns to the 3-percent target, in keeping with its price stability mandate,’ the BSP said in a statement on Thursday.
The central bank said the measured increases in the policy rate will continue to anchor inflation expectations and mitigate the risk of further second-round effects.
‘Despite the 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,’ it added.