WEATHER disruptions, if proven to be more severe than expected, could extend the central bank’s tightening cycle into the first half of 2027, according to a bank economist.
In a commentary, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri Jr. said despite the latest ‘sizeable adjustment’ in the key interest rate, ‘The tightening cycle is likely not over.’
‘Inflation is expected to remain elevated in the coming months, with El Nino adding to price pressures. We see the possibility of another rate hike in December, potentially at least 25 basis points,’ Neri said.
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 the year,’ added the BPI’s lead economist.
Neri said ‘there is reason to believe the economy can absorb the rate hikes,’ adding that despite the drag from inflation, GDP growth is expected to improve in the second half of the year, supported by ‘favorable base effects and a potential recovery in government spending.’
As such, he said, stronger economic activity could give the BSP greater flexibility to tighten policy further.
The lead economist of BPI explained that a ‘prolonged’ period of high inflation may pose a ‘greater risk’ to economic growth than higher interest rates, given that household consumption accounts for around 70 percent of the economy.
‘Bringing inflation back toward target as soon as possible is therefore important not only for preserving price stability but also for creating the conditions for a more sustainable recovery,’ added Neri.
On Thursday, the Bangko Sentral ng Pilipinas (BSP) delivered what Neri described as a ‘decisive’ monetary policy response, raising its policy rate by 50 basis points to 5.50 percent.
‘In our view, the larger rate hike was timely and appropriate given the increasingly challenging inflation environment. It sends a strong message that the BSP remains committed to price stability, which should help in managing inflation expectations,’ Neri said.
Likewise, BMI, a unit of Fitch Solutions, expects the BSP to raise its policy rate by another 25 basis points in December, taking the policy rate to 5.75 percent.
‘Even with the 50bps hike, the Bank remains concerned about the inflation trajectory and expressed openness to further increases,’ BMI said.
According to BMI, the central bank in its monetary policy statement warned that average headline inflation will remain high in 2027, while projecting further acceleration in core inflation.
‘We share its concern about the inflation spillovers from higher global energy prices, recent transportation fare increases and El Niño-related food price pressures,’ BMI said.
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The central bank revised upwards its inflation forecast for 2027 to 6 percent from the 5.4-percent pegged during the Monetary Board’s August 27 rate-setting meeting.
The BSP, however, retained its 6.1-percent inflation forecast for 2026, but noted that the inflation rate could continue to increase in the last quarter of 2026.
While a ‘confluence of factors’ were incorporated in the MB’s latest policy action, BSP Governor Eli M. Remolona Jr. emphasized that ‘the biggest risk at the moment is El Niño.’