BSP eyes stronger response vs inflation

MANILA — The Philippine central bank said on Monday it may consider a stronger monetary policy response if elevated inflation expectations become entrenched, vowing it “will take all necessary action” to ensure that inflation returns to its 3% target.

“If the data and our assessment of evolving risks point to higher inflation expectations becoming entrenched, then we may consider a stronger response,” the Bangko Sentral ng Pilipinas (BSP) said in an e-mailed response to a Reuters query.

The BSP raised its key policy rate by 25 basis points to 4.50% in April.

Here are more details and context of the central bank’s responses:

The BSP said it does not target a specific exchange rate level and intervenes only when excessive volatility poses a serious risk to inflation expectations. The peso has risen 6.1% vs. the dollar in the last three months, according to LSEG data.

The Philippines is sensitive to oil price shocks due to its high dependence on oil imports and current account deficits, but a weaker peso cushions the impact by supporting exports, remittances and revenues from business process outsourcing, the BSP said.

BSP Governor Eli M. Remolona, Jr. said in May the central bank was considering an off-cycle rate hike ahead of a scheduled meeting on June 18.

‘SLOWFLATION’
Meanwhile, the Philippines is experiencing “slowflation,” with slowing growth and accelerating inflation amid oil shocks from the Middle East war, putting the central bank in a difficult policy setting, Metropolitan and Bank Trust Co. (Metrobank) said.

In a commentary on Friday, Metrobank research officer Marian Monette Florendo Obias noted that the economy has not reached stagflation as domestic growth is only weak but not stagnant, while the unemployment rate is seen holding steady.

“The domestic economy remains fragile and highly sensitive to geopolitical developments, with ongoing local political squabbles weighing on overall sentiment,” she said. “For now, while stagflation risks are rising, the Philippines remains in the early phase of ‘slowflation.’”

According to Ms. Obias, ‘slowflation’ refers to an economic condition with fast inflation, weak but still positive growth, and still stable employment.

Economic growth has been sluggish since the second half of 2025, easing to a new post-pandemic low of 2.8% in the first three months of the year.

The country’s latest jobless rate softened to 5% in March from 5.1% in February but worsened from 3.9% a year earlier.

Inflation, on the other hand, has settled above the BSP’s target as it quickened to 7.2% in April from 4.1% in March.

In a separate Viber message on Monday, Metrobank Chief Economist Nicholas Antonio T. Mapa said they expect headline inflation to slightly quicken to 7.3% in May. 

Analysts at Nomura Global Markets Research also project the May print to settle at 7.3%, as slightly lower fuel prices offset still high rice prices and electricity rates. 

Meanwhile, Deutsche Bank Research sees last month’s inflation coming in at 8.1%.

However, Metrobank’s Ms. Obias noted that even the ongoing suspension of excise taxes on kerosene and liquefied petroleum gas (LPG), which was imposed in April, may not be enough to temper energy inflation.

“The suspension of excise taxes on kerosene and LPG may alleviate the impact, but these fuels represent only a small share of overall consumption,” she said. “Diesel and gasoline, which are more widely used, are still subject to excise taxes and continue to lead to second-round effects, limiting the overall effect on inflation.”

A BusinessWorld poll of 16 economists conducted last week yielded a median estimate of 7.9% for headline inflation in May, which is faster than the 7.2% clip in April and 1.3% last year.

It likewise sits right at the upper bound of the central bank’s 7.1%-7.9% forecast for the month, but well above its 2%-4% tolerance range.

The BSP expects inflation to stay above 5% for most of the year to bring the full-year print to 6.3% before cooling to 4.3% in 2027.

HAWKISH BSP
Although the continued acceleration of consumer prices remains largely driven by supply shocks, the central bank is still expected to remain hawkish, Metrobank’s Mr. Mapa noted.   

“Despite the sharp uptick in inflation due mainly to supply side shocks, BSP will still likely resort to tightening of policy,” he said. “We caution against aggressive tightening however given the moderating growth outlook.”

However, Ms. Obias said the “slowflation” scenario is challenging local monetary and fiscal authorities, with the central bank seen to eventually return to easing as high borrowing costs risk hurting the economy further.

“This “slowflation” has made the policy environment for both monetary and fiscal authorities increasingly complex,” she said. “Although the BSP is expected to tighten monetary policy this year, it may eventually reverse course, as a prolonged high-interest-rate environment could further dampen already weak economic growth.”

The Philippine Statistics Authority will release the May inflation data on Friday, June 5, around two weeks before the Monetary Board’s third policy meeting this year on June 18. — Reuters with Katherine K. Chan