Philippines’ central bank stays hawkish as inflation risks remain elevated
The desk interprets the recent actions of the Bangko Sentral ng Pilipinas (BSP) as a firm commitment to maintaining a hawkish stance in response to persistent inflation risks driven by external factors, including the El Niño phenomenon. Per the full note from ing-think, the BSP raised rates by 25 basis points to 5.0% and adjusted its 2027 inflation forecast upwards to 5.4%, reflecting concerns over escalating food prices and significant wage increases. Overall market consensus is built around the notion that additional rate hikes may follow late in 2026, aligning with our expectations of a cautious approach to inflation management. In this context, the absence of immediate calendar events means the market reaction will hinge on external inflation data moving forward.
What the desk is arguing
The desk frames this as a clear signal from the BSP that combatting inflation remains a priority, particularly in light of El Niño's impact on agricultural prices. The central bank's revised forecast assumes worst-case scenarios for food supply disruptions, driving inflation expectations above target levels through 2027.
Further, the BSP's 2026 inflation estimate was revised down slightly to 6.1%, but this has not significantly changed the inflation outlook due to offsetting risks identified, such as the aforementioned wage increases. This indicates that while oil prices are favorable, domestic food price pressures could potentially hinder broader economic stability.
Where it sits in our coverage
Current market consensus for the EUR/USD is at 1.1700 with a spread of 1.1200 – 1.2000, supported by targets from firms such as ING (1.1800), Morgan Stanley (1.2000), and RBC (1.2000).
This view aligns with the prevailing consensus, especially as multiple firms, including UBS and HSBC, echo similar targets, with our desk’s outlook falling towards the upper range of expectations, highlighting an optimistic sentiment surrounding the peso in the near term.
How other firms see it
Aligned firms observing a hawkish outlook include ING, RBC, and UBS, all positioning for a more robust currency basis on the back of inflationary pressures. Conversely, some strategists may be taking a more cautious approach due to potential downside risks identified outside of the BSP’s immediate controls.
Additionally, the trajectory of the USD/JPY mirrors shifts in the Bank of Japan's monetary policy, creating potential spillover effects that warrant close monitoring against the Philippines’ economic backdrop.
How firms align with this view
Aligned with the desk view
Key takeaways
- 01BSP's rate increase to 5.0% underlines a hawkish approach to persistent inflation risks.
- 02Revised inflation forecasts reflect concerns over food price pressures and wage increases.
- 03Consensus targets for EUR/USD suggest an upward bias in market sentiment.
- 04Market responses will be closely tied to upcoming inflation data forecasts.
Market implications
Watch for market responses around the BSP's next rate decision or any economic indicators that point to rising inflation. A breach of the 5.0% mark in securing rates could reinforce bullish sentiment towards the peso and affect the EUR/USD outlook.
Risks to this view
The primary risks to this outlook include unexpected improvements in food supply stability or a rapid decrease in inflation metrics, which could pressure policymakers to reconsider their current rate path. Additionally, significant geopolitical tensions could alter capital flows into the Philippines.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
ING | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Rabobank | Bullish | 1.1800 |
Older quick take Quick take Published 10:45 Philippines Philippines’ central bank stays hawkish as inflation risks remain elevated The BSP raised rates by 25bp to 5.0% and struck a hawkish tone, upgrading its 2027 inflation forecast amid concerns over El Niño-related food inflation and larger-than-expected wage increases. We continue to expect another 25bp rate hike in 4Q26 as policymakers remain focused on inflation risks until core inflation shows clear signs of moderation Philippine policymakers remain alert to the inflation risks posed by El Niño Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Deepali Bhargava Regional Head of Research, Asia-Pacific The BSP raises rates as expected The Bangko Sentral ng Pilipinas (BSP) raised the target reverse repurchase (RRP) rate today by 25bp to 5.0%, in line with both our and consensus expectations. The decision reflects the central bank's assessment that inflation risks remain skewed to the upside, with price pressures likely to keep inflation above target in 2026 and 2027.
The tone was relatively hawkish with the BSP upgrading its 2027 inflation forecast while sounding less cautious on growth, reinforcing its commitment to keeping inflation expectations anchored. El Niño and wage pressures delay return to inflation target While the BSP lowered its 2026 inflation forecast to 6.1% from 6.4%, reflecting the benefit of lower oil prices, this was partly offset by rising risks associated with El Niño, particularly through higher rice prices. The BSP's baseline forecast assumes a severe El Niño scenario, incorporating weaker domestic rice production and higher import prices.
Inflation risks remain firmly on the upside, with El Niño-related food inflation and larger-than-expected wage increases identified as the key drivers. In particular, the BSP raised its 2027 inflation forecast to 5.4%, reflecting concerns that the recently announced 12% minimum wage increase, well above the 6% assumption used in the previous Monetary Policy Report, will generate more persistent inflation pressures. The central bank views wage growth as a significant inflation risk under most scenarios considered.
Given the lagged nature of wage pass-through, the full impact is expected to be felt more strongly in 2027. As a result, inflation is not expected to return to target until 2028, when it is forecast to average 3.3%. The BSP also warned that inflation could rise sharply and potentially peak at elevated levels in 4Q26 before gradually easing thereafter.
Price stability remains BSP’s primary objective On growth, Governor Eli Remolona acknowledged that economic activity has been weaker than expected but remained confident that growth will recover more meaningfully in 2027. He argued that the current monetary policy stance is not constraining activity, noting that the real policy rate is only around 1.75%. Remolona stressed that the BSP's mandate is price stability and that monetary policy has limited scope to directly support growth.
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