BSP to take ‘necessary action’ amid faster-than-expected April inflation

By Katherine K. Chan, Reporter

THE Bangko Sentral ng Pilipinas (BSP) said it will implement necessary measures to keep prices stable “within a reasonable time” after headline inflation accelerated past expectations in April.

“The BSP is committed to fulfilling its primary mandate of slow inflation and will take necessary actions to ensure inflation returns to its 3% target within a reasonable time,” the central bank said in a statement on Tuesday.

“It will remain vigilant for spillover effects, data-driven, and ready to act as needed,” it added.

This comes after the Philippine Statistics Authority reported that inflation sizzled in April to a three-year high of 7.2%, faster than the 4.1% in March and 1.4% in the same month last year. 

The BSP had expected inflation to settle between 5.6% and 6.4%, while 17 analysts polled by BusinessWorld had a median forecast of 5.5%.

At its April 23 meeting, the BSP ended its nearly two-year easing cycle with a 25-basis point (bp) rate hike, bringing the key policy rate to 4.25%.

BSP Governor Eli M. Remolona, Jr. at that time said that they are ready to raise interest rates as much as needed to tame inflation despite its expected impact on domestic growth.

Asian Development Bank Chief Economist Albert Park said the BSP should exercise caution in tightening policy, as the current crisis is largely supply-driven. However, the BSP may need to uphold its price stability mandate if elevated energy costs start spilling over into the prices of other goods and services.

“(O)nce we see the high energy prices, and also the high price of other inputs like fertilizer, or like inputs into the petrochemical industry, into semiconductors, helium, sulfur, we will start to see those higher costs work their way through into higher prices finally,” Mr. Park told CNBC on Tuesday.

“And if that starts to happen and price expectations start to change across the different goods and services that are being produced, then the government may want to — the central banks — may want to start then to consider trying to reduce those inflationary expectations which is really their role,” he added.

OFF-CYCLE MOVE?
Analysts said the central bank may deliver larger rate hikes or raise rates in an off-cycle move amid rising inflation risks after the upside surprise.

ING Regional Head of Research for Asia-Pacific Deepali Bhargava said another 25-bps rate increase is now a “done deal,” with the odds for a 50-bp hike and an off-cycle move rising.   

“Inflation pressures have become increasingly broad based, with food and fuel shocks feeding into core inflation and services, raising the risk of more persistent second round effects,” she said in a commentary on Tuesday. “In this context, a 25-bp rate hike in June looks assured, with risks clearly tilted toward a 50-bp move.”    

ING’s base case now forecasts a total of 75 bps in rate hikes, with a more aggressive stance likely to follow should the Middle East war last longer.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said inflation could quicken to a double-digit pace later this year, which could call for a more aggressive central bank.     

“The BSP may deliver rate hikes larger than the typical 25 bps, either in a regular or off-cycle meeting, with a more forceful move potentially required to rein in inflation expectations,” he said in a separate note.

“While tighter monetary policy could weigh on growth by raising the cost of financing capital expenditures, the economic damage from persistently elevated inflation may be more severe, justifying a more aggressive policy response,” Mr. Neri added.

Meanwhile, Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani expect the central bank to lift borrowing costs by 25 bps in each of its meetings in June, August and October to bring the benchmark rate to 5.25%.   

Nomura raised its 2026 estimate for headline inflation to 6.1% from 4.9% and for core inflation to 4.6% from 3.8% previously.   

“(The April) inflation outturn has likely increased BSP’s concerns over inflation expectations and second-round effects, which are likely to be assessed by BSP as becoming more evident from the further pickup in core inflation, in our view,” Mr. Paracuelles and Ms. Amani said.    

However, they see the BSP reversing its hikes to deliver 75 bps in cuts in the second half of 2027 as they expect inflation to stabilize. 

The BSP projects the headline print to stay above 5% for most of the year. It had also upwardly revised its full-year forecast to 6.3% from 5.1% previously.

The Monetary Board will hold its next policy meeting on June 18.