S&P expects one more BSP rate increase this year

S&P GLOBAL RATINGS expects the Bangko Sentral ng Pilipinas (BSP) to deliver one more rate hike this year, warning that further monetary tightening could weigh on domestic demand over the medium term.

“We think that modest further tightening is on the cards. We think the Philippines will end the calendar 2026 at a 5% interest rate,” S&P Global Ratings Senior Economist for Asia Pacific Vishrut Rana said in an interview on Money Talks with Cathy Yang on One News on Monday.

If realized, the forecast implies just one more 25-basis-point (bp) rate hike this year.

The BSP raised its policy rate by 25 bps to 4.75% on June 18, its second rate hike this year. It has three regular policy meetings left this year on Aug. 27, Oct. 22 and Dec. 17.

“In the Philippines, if you look at the roughly normal inflation level, that’s around 3%. So, when the interest rate is around 4.5%, 5%, then the real interest rate, the cost of funds in the economy is very high. It’s at 2%,” he said.

“That weighs on domestic demand. It would affect domestic demand adversely,” he added. “In our view, we think that the neutral rate for the Philippines would be closer to 4.5%, meaning cuts over forecast horizon rather than hikes.”

Mr. Rana said that if monetary policy has to be tighter for longer, this could trigger a downward revision to S&P’s medium-term growth projection.

Last week, S&P cut its growth projections for the Philippines to 4.1% this year from 5.8% previously. This is within the recently revised 3.5%-4.5% growth projections of the Development Budget Coordination Committee.

S&P also cut its forecast for 2027 to 5.7% from its earlier projection of 6.2%. This is also within the government’s revised 5%-6% target.

The Philippine GDP is expected to pick up to 6.2% in 2028 before easing slightly to 6.1% in 2029, according to S&P.

Mr. Rana said that a slowdown in private consumption and public infrastructure spending and the energy shock drove the lower growth forecasts for the Philippines.

“On the other hand, if we look out to the medium term, our outlook still remains quite favorable,” he said, citing the Philippines’ favorable demographics, supply chain advantages, and special economic zone investment.

“So, we continue to expect private investment to be relatively strong. And we think that some of the tech plays could be happening in the Philippines, which will support the medium-term growth outlook,” he added.

Mr. Rana said the central bank is in a tough position, balancing the need to tighten monetary policy to rein in inflation without further weighing on economic growth.

“It’s a very tricky time for the central bank this year, because on the one hand, there is elevated inflation,” he said. “On the other hand, the demand conditions are weak, and they point to lower inflation in the future, given the shortness in domestic demand.”

“The central bank has to balance that and avoid worsening the growth situation,” he added.

PESO
Meanwhile, the BSP’s tightening cycle could cushion the peso’s weakening as the dollar gains support hawkish US Federal Reserve expectations, notwithstanding further energy price shocks, MUFG Global Markets Research said.

“The Philippine peso, despite offering relatively higher yields, has not been sufficiently insulated from depreciation pressures given elevated US rates. That said, the scope for further weakness could be moderated should the BSP extend policy tightening, although this remains contingent on external factors, particularly the absence of another energy price shock,” it said in a report on Monday.

BSP Governor Eli M. Remolona, Jr. said last month that they have room to tighten further after they raised their inflation forecasts to 6.4% for this year from 6.3% previously and 4.5% for 2027 from 4.3% previously. These are well above the central bank’s 2%-4% tolerance range.

Since the start of the war on Feb. 28, the peso has depreciated to P61-per-dollar levels from closing at P57.665 on Feb. 27.

On Monday, the local unit gained 12 centavos to close at P61.17 a dollar from Friday’s finish. Year to date, the peso has depreciated by P2.38 or 3.89% from its P58.79 finish on Dec. 29, 2025.

MUFG Global Markets Research said Asian currencies will be pressured by the Fed’s hawkish pivot.

“Since the June 18 FOMC (Federal Open Market Committee) meeting, the global market narrative has shifted in favor of a ‘high-for-longer’ US rates environment, keeping Asia FX under pressure. Under new Fed Chair Kevin Warsh, the central bank has pivoted toward a more hawkish tone, signaling a stronger commitment to containing inflation,” it said.

It said there are expectations for a US rate hike in October amid sticky inflation and “resilient” labor market conditions.

The dollar’s strength is also boosted by elevated US Treasury yields despite easing recently following easing tensions in the Middle East. — Justine Irish D. Tabile and Aaron Michael C. Sy